On June 10 the Up Volume vs. the Down Volume on the New York Stock Exchange spiked. Some reports suggested it was the highest level since 1957. In the six sessions since then, however, the S&P 500 Index has rallied a mere 2.8% with the Dow Jones Industrial Average up merely 2.7%.

So what’s the problem? Big up volume has often been the precursor to dramatic rallies. Could it be different this time? Is it possible that the huge volume of June 10 could turn out to be part of an endgame?

A quick overview of the chart below of the S&P 500 Index shows how the bellwether index could be tracing out the last stages of a potential Head and Shoulders Top distribution pattern. The Left Shoulder at the January 2010 High is evident as is the Head at the April 2010 high. The Neckline connecting the February lows with the recent May lows is evident. What is now the issue is the development of the Right Shoulder to complete the formation. So long as the S&P does not get much above 1150 as the current minor cycle uptrend continues to possible completion, the symmetry of the pattern would remain intact.

Chart courtesy Tradestation Securities

But what about that huge volume back on June 10?

One of the hallmarks of an Head and Shoulders top is increasing volume as the pattern progresses. Notice at the Right Shoulder how trading volume was less than the activity that developed in the decline that culminated in the price lows in late May and early June. If volume remains weak as the short-term rally continues and then peaks and then increases if weakness develops, we would look for increasing volume as prices sell lower toward the H&S Neckline and then break below it.

This is what we currently know:

We know that prices found supports during the recent decline toward the February 2010 price lows that are also roughly coincident with 200-day (40-week) moving averages. Those supports now define a possible Head and Shoulders Top Neckline.

We know that the Minor Cycle is positive, but that the larger Intermediate Cycle remains negative. The Major Cycle is positive.

We know that if the Minor Cycle fails toward 1150—S&P 500 Index and within the context of a lingering Intermediate Cycle negative, the odds would be good that the H&S Neckline could be seriously challenged. The pattern would resolve negatively.

We know that nothing but a positive turn on the Intermediate Cycle brought about by more strength and movement to new highs would re-assert the Major Cycle uptrend.

We know that both CPFL and MAAD Daily Ratios remain “oversold” to underscore upside potential, but “oversold” conditions can persist even in the face of price strength on the smaller cycles.

We know that both CPFL and MAAD must make new highs with prices to suggest a resumption of the bullish uptrend on the Major Cycle.

We know that Cumulative Volume suffered substantial downside damage during the recent decline (from the April 26 highs) that will not be easily repaired.

We could continue the “What We Know” list with a number of other observations, but the point at this juncture remains relatively simple – the burden of proof for the larger cycle uptrend that began after the March 2009 price lows remains solidly in the bullish camp. Market action either turns decidedly favorable and new highs follow to re-assert the uptrend, or they do not. If the latter scenario develops and prices sink below the February lows (1040-78—S&P 500 and 9757.55-Dow 30), given the continuing anemic performance of MAAD, we would have to take a very serious look at those March 2009 price lows.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD perked a bit higher last week, but relative to index pricing the indicator continues to look relatively anemic on both the Minor and Intermediate-term Cycles. The indicator remains “oversold” on both the Minor and Intermediate Cycles, but history has demonstrated that condition can persist. MAAD also remains in an uptrend initiated after the March 2009 price lows, but not my much. In other words, it wouldn’t take much concerted selling to drive MAAD below that uptrend.

So the indicator, like the broad market, is currently stuck in zone of relative indecision. Defined strength is required to re-assert the defined uptrend, but more selling could not only terminate the 14-month-old uptrend, but it could set the market up for a serious decline. And given the fact that MAAD has remained so weak since the March 2009 lows, it wouldn’t take much selling to propel it to new lows. Such action would not bode well for index pricing.

Click on charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

Like MAAD, CPFL remains “oversold” on both the Minor and Intermediate-term Cycles. And while it’s true that CPFL did not sink to new lows with prices as the April/May decline progressed, the indicator must also rally to new highs to re-assert the larger cycle uptrend. That could be a tall order if index prices begin to falter. One possibility that would definitely not be positive would be for the market to rally to new highs, but for CPFL to fail to confirm such action. That failure would be a sign that options players had adopted a more negative tone and since we cannot recall an instance where the market rallied and CPFL did not turned out well, the burden yet again remains on the bullish camp.

Click on charts to enlarge

Conclusion

Short-term strength gained some upside follow through last week, but buyer enthusiasm remains weak. In the background we see the potential for an Head and Shoulders distribution top formation. While the Minor Cycle could allow for strength toward 1150—S&P 500, weakness below the recent lows toward 1040—S&P 500 would not bode well for the market.

Adding to the mix, we also know that the longer the market fusses around below those April highs (1219.80—S&P 500 and 11258.01—Dow 30), the greater the odds for a downside resolution. In other words, it takes buyers to drive prices higher, but a market can drop of its own weigh

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

*Note: All data is for week ending on Friday even though ending date may be a holiday.
Unchanged issues in MAAD calculations are not counted.

MAAD data for past 30 days* CPFL data for past 30 Days

*Note: Unchanged issues are not counted.

Robert McCurtain is a technical analyst, market timer and private investor based in New York City. If you would like to read more about how the CPFL is constructed, read a Futures article on the concept. This will take you to the MAAD article. Robert can be reached at traderbob@nyc.rr.com.