Sharp Contraction in S&P’s Trading Range has Intermediate-term Positive Implications

Market averages settled mixed Tuesday, with the Nasdaq underperforming
throughout the session and closing lower while blue chips retained an
underlying bid. The S&P500 managed another decent close, gaining 0.7% to 1348,
although once again there was minimal institutional participation. NYSE TICK
action was mixed, with TICKscore closing at -5 and cumulative Adjusted TICK
essentially flat at -4. The lack of sustained buying power continues to call
into question the short-term sustainability of the current advance.

Rob Hanna over at Quantifiable Edges noted that in recent weeks, the overall
range for the S&P500 has been unusually small compared with prior weeks. He
posted a study comparing the range of the last thirteen sessions to the range
of the session fourteen days back, noting that a 'range contraction' has had
generally positive implications looking out one month. I replicated his study
with similar, although not identical results.

Building on that study, I found interesting results comparing the one-week
range for the S&P. This is the difference between the highest high and lowest
low of the past five sessions (click here for a chart). Note that as of
January 22nd, the one-week range for the S&P500 surged to 138 S&P points, the
highest level since 2001. Over the past five sessions, however, the range has
fallen dramatically to only 45 S&P points. Looking back at times when the
range has dropped to less than one-third of the range three weeks ago, we find
similarly bullish implications looking out one month. The last thirty times
this setup has been triggered are listed in the table below. Note that in 25
out of 30 cases, or 83% of the time, the S&P was trading at a higher level one
month later. That compares favorably with the 59% at-any-time odds for a
higher SPX one month later.

One-Week SPX Range <33% of Range Three Weeks Ago
02/12/08... S&P ??? one month later
04/11/07... S&P +5.1% one month later
08/03/05... S&P -2.0% one month later
06/03/04... S&P +0.8% one month later
10/12/01... S&P +2.6% one month later
10/10/01... S&P +3.2% one month later
05/14/01... S&P +0.6% one month later
06/13/00... S&P +1.6% one month later
05/09/00... S&P +4.2% one month later
11/22/99... S&P +0.9% one month later
11/10/98... S&P +4.9% one month later
10/29/98... S&P +9.8% one month later
10/23/98... S&P +8.7% one month later
09/09/97... S&P +5.3% one month later
08/23/96... S&P +2.9% one month later
08/14/96... S&P +1.4% one month later
08/09/96... S&P +0.3% one month later
06/04/96... S&P +0.2% one month later
04/01/96... S&P +0.1% one month later
11/24/95... S&P +2.0% one month later
08/10/95... S&P +2.7% one month later
06/13/94... S&P -2.4% one month later
03/23/94... S&P -4.2% one month later
12/01/93... S&P +1.5% one month later
06/14/93... S&P +0.1% one month later
10/26/92... S&P +1.7% one month later
01/17/92... S&P -1.5% one month later
12/11/91... S&P +9.9% one month later
09/16/91... S&P +0.2% one month later
12/28/90... S&P +2.2% one month later
09/17/90... S&P -4.6% one month later

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

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