The Importance of Follow-through After a 2% Up Week

Going all the way back to 1950, there have been a total of 247 occurrences in
which the S&P settled up 2% or more on a weekly basis, and made higher highs
and another higher close the following week. In 188 of those cases, or 76% of
the time, the S&P proceeded to post yet another higher weekly close within the
next two weeks. This week has the potential to fall into that category, as the
S&P gained over 2% last week and has so far made higher highs this week (and
is up a little less than 1% with two days to go.

The accuracy of the above signal sounds impressive until you consider that the
S&P's 'at-any-time' odds of posting a higher weekly close within the next two
weeks is approximately 70%. That makes the 76% win rate for the signal above
only slightly better than random.

However, the accuracy level of the above signal can be improved upon
significantly by only considering those setups that occur immediately after
the S&P closed at a three-month low. In so doing, we're waiting for this
weekly bottoming pattern to occur at a low point on the chart, thereby
increasing the odds of success. Using the guidelines outlined above but only
considering those signals when, just prior to the 2%+ rally, the S&P closed at
a three-month or better low, we come up with a total of 34 signals since 1950,
all of which are shown in the table below. Note that in 31 out of 34 cases, or
91% of the time, the S&P posted another higher weekly close within the next
two weeks...

S&P +2% for Week Following Three-Month Closing Low,
then Higher Weekly Highs and Close Next Week
12/07/07... S&P500 -1.7% three weeks later
06/04/04... S&P500 +1.2% one week later
10/18/02... S&P500 +1.5% one week later
03/08/02... S&P500 +0.2% one week later
10/05/01... S&P500 +1.9% one week later
04/20/01... S&P500 +0.8% one week later
10/29/99... S&P500 +0.5% one week later
09/18/98... S&P500 +2.4% one week later
12/23/94... S&P500 +0.1% two weeks later
05/27/94... S&P500 +0.6% one week later
10/23/92... S&P500 +1.1% one week later
07/10/92... S&P500 +0.2% one week later
03/09/90... S&P500 +1.2% one week later
12/18/87... S&P500 +1.2% one week later
10/09/81... S&P500 +0.4% three weeks later
05/02/80... S&P500 +0.9% two weeks later
11/26/76... S&P500 +1.5% two weeks later
09/26/75... S&P500 +2.3% two weeks later
10/18/74... S&P500 +2.2% two weeks later
03/01/74... S&P500 +2.4% one week later
07/20/73... S&P500 +2.3% one week later
04/05/68... S&P500 +3.5% one week later
10/21/66... S&P500 +2.6% one week later
07/09/65... S&P500 -0.5% three weeks later
12/06/63... S&P500 +0.1% one week later
11/09/62... S&P500 +2.4% one week later
07/06/62... S&P500 +3.0% one week later
02/09/62... S&P500 +0.2% one week later
05/08/53... S&P500 +0.6% two weeks later
11/07/52... S&P500 +2.0% two weeks later
03/15/52... S&P500 +0.5% one week later
12/08/51... S&P500 +0.5% two weeks later
07/13/51... S&P500 +2.5% two weeks later
07/28/50... S&P500 +2.5% one week later

Given that the S&P closed at a new 52-week low prior to last week's 2%+ rally,
this week has the potential to trigger the signal. It's already posted higher
highs, so all that's needed is for the S&P to close above 1329.51 on Friday.
Should that occur, odds would favor a subsequently higher weekly close on
April 4th or 11th.

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

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