Outside Bar and Persistently Oversold Oscillator Readings Point to a Short-term Bounce

Stock indexes closed sharply lower Tuesday following a late-session dive. The
S&P500 settled down 1.8% at 1390, its lowest close since last March. Volume
increased for the third day in a row, but it’s noteworthy that NYSE TICK
action continued to reflect an absence of large institutional sellers.
TICKscore closed at a neutral -2, cumulative Adjusted TICK settled at +190.
Breadth was negative at not quite 2:1, sending the cumulative breadth line
below its December low. It’s still holding above the November low, leaving
open the potential for a positive divergence.

The S&P500 drew an ‘outside bar’ Tuesday as it traded above Monday’s high and
below Monday’s low. That’s noteworthy when you consider this outside bar is
forming at a multi-month low on the daily chart (similar to November 26th).
Historically, an outside bar at an extreme point on a chart can be a good
indication of a short-term trend change. The table below lists every instance
over the last 30+ years in which the S&P closed down, hit its lowest level in
at least two months and formed an outside bar. There have been twenty
instances since 1975, and you can see that the majority led to an upside
reversal over the following week…

S&P500 Outside Day Closes Down at Two-Month Low
01/08/08… S&P500 ??? one week later
11/26/07… S&P500 +4.6% one week later
07/31/07… S&P500 +1.5% one week later
04/20/05… S&P500 +1.7% one week later
02/07/03… S&P500 +0.6% one week later
04/26/02… S&P500 -0.3% one week later
07/10/01… S&P500 +2.8% one week later
03/20/01… S&P500 +3.5% one week later
04/02/92… S&P500 +0.0% one week later
01/09/91… S&P500 +1.5% one week later
09/26/90… S&P500 +2.1% one week later
10/09/84… S&P500 +1.9% one week later
02/08/84… S&P500 +0.3% one week later
02/03/84… S&P500 -2.9% one week later
06/21/82… S&P500 +2.9% one week later
06/03/82… S&P500 -2.0% one week later
03/08/82… S&P500 +2.0% one week later
02/22/82… S&P500 +1.5% one week later
08/31/81… S&P500 -3.9% one week later
09/21/77… S&P500 +0.2% one week later
08/24/76… S&P500 +1.6% one week later

Also noteworthy is that the 5-day RSI for the Nasdaq100 closed below 25 for
the third consecutive session Tuesday. That’s usually a good sign that selling
pressure is at or very near a short-term exhaustion point, allowing buyers to
at least temporarily gain the upper hand. Since 1995, this RSI pattern has
occurred a total of thirty times, twenty-seven of which were followed by a
higher Nasdaq close when the RSI rebounded back over 25 (typically within 1-2
days of the signal.)

Nasdaq100 5-day RSI under 25 Three Consecutive Sessions
01/08/08… NDX ??? when RSI back over 25
11/12/07… NDX +4.2% when RSI back over 25 (one session)
03/01/07… NDX -0.6% when RSI back over 25 (three sessions)
07/17/06… NDX +0.3% when RSI back over 25 (one session)
05/15/06… NDX -3.3% when RSI back over 25 (seven sessions)
02/07/06… NDX +1.1% when RSI back over 25 (one session)
10/12/05… NDX +0.8% when RSI back over 25 (one session)
06/27/05… NDX +1.0% when RSI back over 25 (one session)
04/18/05… NDX +0.8% when RSI back over 25 (one session)
01/24/05… NDX +0.7% when RSI back over 25 (one session)
01/06/05… NDX +0.5% when RSI back over 25 (one session)
08/09/04… NDX +2.1% when RSI back over 25 (one session)
07/16/04… NDX +2.1% when RSI back over 25 (two sessions)
08/08/03… NDX +1.3% when RSI back over 25 (one session)
05/06/02… NDX +10.5% when RSI back over 25 (two sessions)
04/26/02… NDX +2.1% when RSI back over 25 (two sessions)
02/07/02… NDX +2.7% when RSI back over 25 (one session)
09/07/01… NDX -12.2% when RSI back over 25 (seven sessions)
06/18/01… NDX +3.3% when RSI back over 25 (two sessions)
02/22/01… NDX +1.2% when RSI back over 25 (one session)
02/09/01… NDX +2.1% when RSI back over 25 (three sessions)
12/21/00… NDX +9.5% when RSI back over 25 (one session)
10/12/00… NDX +9.1% when RSI back over 25 (one session)
04/14/00… NDX +10.0% when RSI back over 25 (one session)
10/07/98… NDX +4.2% when RSI back over 25 (two sessions)
08/31/98… NDX +6.6% when RSI back over 25 (one session)
12/15/97… NDX +1.3% when RSI back over 25 (one session)
07/15/96… NDX +4.0% when RSI back over 25 (two sessions)
06/20/96… NDX +1.2% when RSI back over 25 (one session)
12/18/95… NDX +4.9% when RSI back over 25 (one session)
11/22/95… NDX +1.6% when RSI back over 25 (one session)

Categories : Archived EOD Commentary, End-of-Day Commentary

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