Stock indexes capture new highs in low-volume week

Weekly Review: MAAD & CPFL Analysis

 

Market Snapshot:
 

Last

Week Chg

Week %Chg

S&P 500 Index

1805.81

+1.05

+.06%

Dow Jones Industrials

16086.41

+21.64

+.13%

NASDAQ Composite

4059.89

+68.24

+1.71%

Value Line Index

4295.12

+55.43

+1.31%

Russell 2000

1142.89

+17.97

+1.60%

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

If you have been following our work for any length of time you have probably presumed, and correctly, that we spend a lot of time studying market pricing and a variety of indicators. The comparative relationship of the two in a broad variety of combinations creates the best results.

For example, since our Call/Put Dollar Value Flow Line (CPFL) peaked back on June 11, we subsequently pointed out how the indicator declined below an uptrend line of nearly two years in duration in early September. How it sank to a new short to intermediate-term low on October 9. And how it has been rallying since then, but has failed to get back above the June 11 high, or the uptrend line it fractured in early September, as that line has been rising. And now the Daily CPFL Ratio is now back into “Overbought” territory.

Some studying the CPFL chart in the face of higher market prices might be inclined to say, “So what? The indicator is at the very least way too early.” In one respect they are correct. For an investor to have determined his investment strategy based on that peak in CPFL back in June would have been a mistake. In fact, the S&P 500 has rallied another 9% since CPFL peaked on June 11. So why even both with it?

Long-term upside “Measured Move” targets as calculated from March 2009 bear lows

 

Recent High

Upside Target

Diff / 11-29

Diff / 9-27

S&P 500

1813.55

1778

+1.99%

-2.7%

Dow 30

16174.51

16810

-3.78%

-6.5%

NASDAQ Comp.

4069.70

4025

+1.11%

-5.6%

Value Line

4311.00

4410

-2.24%

-7.8%

Russell 2000

1147.00

1160

-1.12%

-6.7%

                                                                                                         Average:     -.80%                  -5.86%

The point of all these indicators is to provide information. What we see in CPFL is an indicator that has failed, net, for over five months to make new highs. For reasons beyond our need to know, options buyers bought Put contracts on a Dollar Value basis heavily from June 11 to October 9. To a somewhat lesser extent they have been buying more Calls since October 9. But what is still true is that as the market has been rallying to new highs, CPFL has not confirmed that strength. In other words, that CPFL failure remains as a niggling, longer-term negative divergence.

Market Overview – What We Know:

  • Major indexes rallied to new closing highs again last week.
  • But in light of weak holiday activity, market volume declined more than 30%.
  • Minor Cycle in S&P 500 remains positive and must decline below lower edge of 10-Day Price Channel (1783.38 through Monday) to suggest more negative short-term tone. Intermediate Cycle remains positive until lower edge of 10-Week Price Channel (1697.15 through December 6) is penetrated.
  • VBVI, our VIX-based volatility indicator, remains toward “Overbought” territory at 88.30% on Minor Cycle even though it pulled back marginally last week. On Intermediate Cycle VBVI remains positive, but overheated at 99%.
  • Daily MAAD hit a new high last week and surpassed its November 15 peak to eliminate a negative divergence that had lasted for nearly two weeks to underscore still bullish market tone. Indicator remains above uptrend line stretching back to November 2012 intermediate-term lows. On week, 15 issues were positive and 5 were negative.
  • Daily CPFL rallied to new short-term high week, but remains below uptrend line stretching back to October 2011 lows, and was still about 50% below short to intermediate-term high made June 11. Strength since October 9 short-term low continues to look like “return action” rally in larger, negative trend.

On an even larger scale, CPFL moved sharply higher with market pricing off of the March 2009 lows. That synchronicity lasted until February 25, 2011, and just before the May 2011 Intermediate Cycle highs, the point that preceded the largest decline (nearly 22%) of this bull market. CPFL has yet to get back above that February 2011 high. And while the indicator made an intermediate-term low with pricing into the October 2011 lows and then rallied smartly higher, it did make that peak this past June 11. So not only is there a long-term divergence relative to the March 2009 lows evident in CPFL, but there is also a secondary uptrend that has been in effect for more than two years with another negative divergence evident. In short, options players have been participating in this bull market to a lesser extent recently than they bought Calls on a Dollar Value basis from March 2009 to early 2011.

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