Two Consecutive Days of Lopsided Negative Breadth a Short-term Bullish Indication

Friday's 12-point gain allowed our intraday TrendCatcher strategy to just
finish out the month of February in the plus column, its thirteenth
consecutive winning month. It was a challenging month overall, but as I noted
in my intraday update from February 1st, "keep in mind we've seen similar
drawdowns in November '07, August '07, February '06 and December '05 (see
track record). It's inevitable for a strategy that's averaged a monthly gain
of 30 S&P points over the past twelve months to have rough patches. But it's
never paid to get discouraged and stop trading, as the strategy was quick to
recoup those losses over the following month."

NYSE volume finally broke out of its three-week trading range Friday as over
1.7 billion shares traded on the big board. The S&P closed sharply lower,
ending down over 2.5% at 1330. Breadth settled 6:1 negative and volume
associated with declining issues accounted for 94% of total NYSE volume.
Remember this chart from back in January highlighting the unusually high
number of 90% down volume days over the past year? That number has only grown
since then. As of Friday, we're now up to eighteen 90% down volume days over
the past year, compared to the previous record of six. To say the recent
cluster of 90% down volume days is unprecedented would be an understatement.

The Dow Utilities Index sold off sharply Friday, ending down over 3% at 477.
Remember that from a long-term perspective, a 52-week low for the Utilities
Index is typically a bearish sign for the broad market. There's been virtually
no major long-term decline that wasn't preceded by a 52-week low for the
Utilities Index, reinforcing the notion that the market's overall prospects
are less than ideal.

On a short-term basis, it's noteworthy that Friday marked the second
consecutive session that the number of declining issues outpaced the number of
advancers by more than 2:1, reflecting an extreme amount of selling pressure.
From a short-term perspective, this type of action is usually an indication
that sellers are at or near an 'exhaustion point', and the S&P typically
bottoms out and closes higher three or five trading days later. Every
occurrence of this setup since the beginning of 1999 is listed in the table
below. Notice that the S&P has closed at a higher level three or five trading
days later in 32 out of 40 cases, or 80% of the time. Also, note that the S&P
ended down more than 0.5% only three times out of forty occurrences, while it
gained more than 0.5% twenty-three times...

2:1 negative NYSE breadth two consecutive days
02/29/08... ???
12/17/07... S&P +1.0% three days later
11/12/07... S&P +0.8% three days later
10/16/07... S&P -1.2% five days later (*)
08/28/07... S&P +2.9% three days later
08/15/07... S&P +2.8% three days later
07/27/07... S&P +0.5% three days later
06/25/07... S&P +0.5% three days later
06/06/07... S&P -0.1% five days later
03/05/07... S&P +2.0% three days later
07/13/06... S&P +0.6% five days later
06/13/06... S&P +2.3% three days later
05/12/06... S&P -1.9% five days later (*)
03/07/06... S&P +0.4% three days later
10/27/05... S&P +2.0% three days later
10/06/05... S&P -1.2% five days later (*)
09/20/05... S&P -0.5% five days later
08/05/05... S&P +0.2% three days later
05/13/05... S&P +2.7% three days later
04/14/05... S&P -0.2% five days later
03/22/05... S&P +0.2% three days later
01/04/05... S&P -0.4% five days later
07/26/04... S&P +1.5% three days later
05/07/04... S&P -0.3% five days later
04/29/04... S&P +0.5% three days later
04/14/04... S&P +0.7% three days later
03/11/04... S&P +0.4% three days later
07/17/03... S&P +0.7% three days later
01/27/03... S&P +1.5% five days later
10/07/02... S&P +2.4% three days later
09/24/02... S&P +1.0% three days later
08/05/02... S&P +8.5% three days later
07/19/02... S&P +0.6% five days later
10/30/01... S&P +2.6% three days later
09/20/01... S&P +2.8% three days later
03/22/01... S&P +5.8% three days later
10/18/00... S&P +4.0% three days later
10/12/00... S&P +1.5% three days later
11/23/99... S&P +0.3% five days later
10/13/99... S&P +0.3% five days later
01/13/99... S&P +1.3% three days later

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

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