Stock market hits new highs, but celebration is muted

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1709.91

+21.92

+1.29%

Dow Jones Industrials

15451.09

+75.03

+.48%

NASDAQ Composite

3774.73

+52.55

+1.41%

Value Line Arithmetic Index

4026.21

+62.69

+1.58%

Minor Cycle* (Short-term trend lasting days to a few weeks) Positive

Intermediate Cycle* (Medium trend lasting weeks to several months) Positive

Major Cycle* (Long-term trend lasting several months to years) Positive

* Cycle status is based on S&P 500

Yes, all of the major indexes rallied to new highs and their best levels since March 2009 last week. Even the venerable Dow Jones Transportation Average hit a new high to re-confirm Dow Theory. Even futures contracts for the S&P 500, Dow 30, NASDAQ Composite, and Russell 2000 also rallied to new highs.

Also on the bright side of the ledger, recent optimism by our Most Actives Advance/Decline Line (MAAD) was vindicated after the indicator rallied to a new high September 4. MAAD made its most recent short-term high last Wednesday before backing off marginally Thursday and Friday. And while the Daily MAAD Ratio became extremely “Overbought” on September 11 at 2.70, the indicator had faded back to 1.66 last Friday and was apparently engaging in some internal corrective action, despite higher market prices. The Weekly MAAD Ratio was moderately “Overbought” at 1.44.

Market Overview – What We Know:

  • All major indexes rallied to new highs last week with the biggest gain coming in the Value Line index, up 1.58%. Cumulative Volume (CV) confirmed strength in S&P 500, Dow 30, and NASDAQ Composite cash indexes, but not in S&P and NASDAQ Emini futures, or in Dow 30 futures.
  • Market volume rose nearly 21% on week with a 64% surge last Friday on a sharp down day.
  • Short-term trend remains positive. S&P 500 must sell below lower edge of 10-Day Price Channel (1673.16 through Monday) to suggest new negative. Intermediate Cycle turns lower with weakness below lower edge of 10-week Price Channel (1654.26 through September 27).
  • Our short-term volatility indicator (VBVI) was last at 91%, up nearly 12 percentage points on week and toward level that has, historically, coincided with other near-term tops. Indicator was at 22% at June 24 short-term low and toward 14% at recent low. Weekly VBVI remains positive.
  • Daily MAAD rallied to new high last Wednesday before fading last two sessions of week. Weekly MAAD hit new high and best level since March 2009 last week. On week, 17 issues were positive, 2 were negative, and 1 was unchanged. Daily MAAD Ratio was moderately “Overbought” at 1.66 with Weekly Ratio moderately overheated at 1.44.
  • CPFL hit new short to intermediate-term low September 16 and continues to languish. Indicator was last just below long-term uptrend line stretching back to October 2011. Indicator is “Oversold” on both Daily and Weekly cycles.

There are areas of concern, however. Short-term Trading Oscillators are now historically “Overbought” on all cycles including Minor, Intermediate, and Major. Short-term Momentum, that peaked last Thursday, has moved back into a zone of vulnerability after failing to confirm the new highs in the S&P 500. If short-term Momentum continues to fail on the upside, it would be the first such failure since the Intermediate Cycle low put in place last November 16. Since that low there have been six short-term rallies. On the Intermediate Cycle, Momentum peaked the week ending May 24 with no new highs since then to suggest the upward impetus of the market, despite new price highs, has been diminishing for the better part of the past four months.

Market Overview – What We Think:

  • New highs last week by all of major indexes vindicated recent strength by MAAD, but short-term “Overbought” conditions in all of same indexes, upside failures in short-term Momentum, and an overheated reading in VBVI, despite new highs in MAAD and pricing, make us wonder if strength will last.
  • In other words, broad market has been snared by old adage – “Be careful what you wish for.” Put another way, on very practical level, either prices continue higher or, if they do not, the larger Intermediate Cycle that has been in effect since last November 16 must remain intact, even on a short-term pull back, or the larger Major Cycle that has been underway since March 2009 could be in jeopardy.
  • First, defined, downside “failsafe” levels will come at lower edge of 10-Day Price Channels. If those levels are fractured on new round of selling, then next level that would come into view would be lower edge of 10-Week Channels.
  • Even though new highs have developed, burden of proof still rests on shoulders of bulls who must continue to prove their point. In this kind of environment with so many crosscurrents, bears could simply win by default.
  • In background there is lingering potential for problems on larger cycles in that fall period has historically been backdrop for some of worst declines in stock market history. Think October 1929, October 1987, and October 2007.

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