Short-term Buy Setup for the Nasdaq Based on the 14-day RSI

The S&P500 settled down 0.8% at 1326 Wednesday as buyers were overwhelmed by
better selling pressure in afternoon trading. That's exactly what you don't
want to see immediately following the kind of 90% down volume session we saw
Tuesday. Every instance in which this has occurred since 1980 is listed in the
table below. Note that in 10 out of 11 occurrences, the S&P fell at least 1%
more (intraday) within the next few sessions...

90% Down Volume, SPX Off More Than 0.5% Next Day
02/06/08... SPX ???
01/18/08... SPX -3.8% intraday one session later
01/16/08... SPX -3.1% intraday one session later
08/15/07... SPX -2.6% intraday one session later
07/27/07... SPX -1.3% intraday three sessions later
03/11/03... SPX -1.5% intraday one session later
08/28/98... SPX -6.8% intraday one session later
01/15/90... SPX -1.1% intraday one session later
10/19/87... SPX -3.8% intraday one session later
09/12/86... SPX -1.0% intraday two sessions later
07/08/86... SPX -0.8% intraday two sessions later
01/08/81... SPX -1.0% intraday one session later

One noteworthy development is that the 14-day RSI for the Nasdaq100 (NDX) is
on the verge of entering technically oversold territory. RSI stands for
'relative strength index', which as some have noted is somewhat misleading
given that the RSI does not compare the relative strength of two issues, but
rather the internal strength of a single issue. The calculation is complex,
but essentially it separates up and down days over a certain period of time
and compares the average change when the market rallies against the average
change when the market declines. The end result is a reading between 0 and
100. When it was introduced by Welles Wilder back in 1978, he recommended
using a 14-day RSI, meaning the last fourteen sessions are used in the
calculation, and that's still the default in most technical analysis packages.
Note from this long-term chart of the Nasdaq 14-day RSI that it generally
oscillates between 70 on the upside and 30 on the downside. When it drops
under 30, as it's on the verge of doing now (it closed at 30.40 on Wednesday),
it signals the Nasdaq is technically oversold and ripe for a short-term
bounce. I went back and noted the last thirty instances in which the NDX 14-
day RSI closed under 30, followed by the date when the RSI closed back over 30
and the performance of the Nasdaq in this time frame. Note that in 27 out of
30 cases, or 90% of the time, the oversold condition led to a short-term
bounce. Just about any lower close on Thursday will trigger this short-term
buy setup (specifically, a close below NDX 1736.25).

Nasdaq100 (NDX) 14-day RSI Closes Under 30
01/22/08... NDX +1.7% when RSI >30 (two sessions)
01/17/08... NDX +0.1% when RSI >30 (one session)
01/08/08... NDX +2.0% when RSI >30 (one session)
06/12/06... NDX +0.7% when RSI >30 (one session)
05/16/06... NDX -1.5% when RSI >30 (seven sessions)
04/15/05... NDX +0.1% when RSI >30 (one session)
01/24/05... NDX +0.7% when RSI >30 (one session)
08/06/04... NDX +0.3% when RSI >30 (one session)
07/02/02... NDX +3.3% when RSI >30 (one session)
05/03/02... NDX +7.7% when RSI >30 (three sessions)
04/29/02... NDX +2.4% when RSI >30 (one session)
09/17/01... NDX -0.3% when RSI >30 (twelve sessions)
09/06/01... NDX +0.3% when RSI >30 (two sessions)
04/03/01... NDX +8.6% when RSI >30 (two sessions)
03/12/01... NDX +6.5% when RSI >30 (one session)
02/28/01... NDX +3.1% when RSI >30 (one session)
10/11/00... NDX +5.7% when RSI >30 (two sessions)
04/14/00... NDX +10.0% when RSI >30 (one session)
08/31/98... NDX +6.6% when RSI >30 (one session)
10/27/97... NDX +7.0% when RSI >30 (one session)
07/15/96... NDX +4.0% when RSI >30 (two sessions)
06/24/94... NDX +2.7% when RSI >30 (one session)
04/13/94... NDX -0.1% when RSI >30 (six sessions)
03/29/94... NDX +1.7% when RSI >30 (four sessions)
02/22/93... NDX +2.9% when RSI >30 (two sessions)
02/16/93... NDX +0.4% when RSI >30 (two sessions)
06/17/92... NDX +1.2% when RSI >30 (two sessions)
04/02/92... NDX +2.2% when RSI >30 (two sessions)
06/24/91... NDX +0.6% when RSI >30 (two sessions)
10/11/90... NDX +0.9% when RSI >30 (one session)

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

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