Down Open/Up Close Not a Short-term Positive Following Upside Gap

Stock indexes settled near unchanged levels Thursday on light volume. Breadth
was flat, and despite the S&P500 posting higher highs and higher lows, New 52-
week highs contracted on the NYSE while new 52-week lows expanded.

While S&P futures 'recovered' from a down open to finish slightly positive,
that kind of action doesn't have such positive short-term implications coming
on the heels of Wednesday's unfilled upside gap. Price action alone suggests
the market is a bit extended at the moment, meaning a close below today's
settlement appears likely within the next few sessions. In the table below is
each of the last thirty instances in which the front-month S&P futures
contract opened lower and closed higher immediately following an unfilled
upside gap. Note that in 26 out of the last 30 occurrences stretching back a
decade, the S&Ps posted a subsequently lower close within the next three days.
That's significantly higher than the S&Ps 66% at-any-time odds of a lower
close within the next three days...

S&P Futures Open Lower, Close Higher After Gap Up Session
04/17/08... ???
12/26/07... Lower S&P close one session later
12/06/07... Lower S&P close one session later
11/29/07... Lower S&P close three sessions later
02/15/07... Lower S&P close one session later
08/17/06... No lower close within three sessions
08/03/06... Lower S&P close one session later
04/05/04... Lower S&P close one session later
03/18/04... Lower S&P close one session later
01/03/03... No lower close within three sessions
11/15/02... Lower S&P close one session later
11/05/02... Lower S&P close two sessions later
10/18/02... No lower close within three sessions
10/14/02... No lower close within three sessions
07/30/02... Lower S&P close two sessions later
06/18/02... Lower S&P close one session later
11/06/01... Lower S&P close one session later
07/13/01... Lower S&P close one session later
04/19/01... Lower S&P close one session later
03/27/01... Lower S&P close one session later
11/15/00... Lower S&P close one session later
10/20/00... Lower S&P close two sessions later
03/17/00... Lower S&P close one session later
08/24/99... Lower S&P close two sessions later
06/17/99... Lower S&P close three sessions later
06/07/99... Lower S&P close one session later
09/15/98... Lower S&P close two sessions later
02/03/98... Lower S&P close one session later
04/30/97... Lower S&P close one session later
04/16/97... Lower S&P close one session later
04/08/97... Lower S&P close one session later

NASDAQ futures drew an identical price pattern Thursday, and NDX futures have
a similar track record in terms of calling for a subsequently lower Nasdaq
close within the next three days. Out of the last 30 occurrences stretching
back to 1999, 25 led to a lower NDX settlement within the next few sessions.

The Nasdaq Volatility Index closed in statistically oversold territory
Thursday. A second close under its lower bollinger band would have short-term
negative implications for the NASDAQ. For that to occur Friday, the VXN would
need to settle at 23.65 or lower.

Also keep an eye on the VIX/VXV Ratio, as its starting to approach the .90
area. Should this trend continue, it would have negative longer-term
implications for stocks (see my April 8th column.)

Studies such as yesterday's Cumulative TICK setup indicate the market is
likely remain on generally firm footing heading into the end of the month. But
looking beyond April, it's important to note that speculators appear to be the
ones in the drivers' seat. Note from the NASDAQ/NYSE Volume Ratio, and
specifically the 20-day moving average of the ratio, that we're approaching
the point where NASDAQ volume consistently runs 50% above NYSE volume. We're
not there now, but if NASDAQ volume continues to outpace big board volume over
the next 1-2 weeks, it's likely we'll see the 20-day average of the Ratio in
the 1.50 area. That's historically represented a good intermediate-term sell
signal for the NASDAQ, as it indicates speculative participation has reached a
fever pitch. On the opposite end of the spectrum, last week's program trading
report reveals that principal program activity continues to drag along at
multi-year lows, reflecting a general lack of interest among institutions.
That's not the kind of combination that typically leads to long-term strength,
suggesting the S&P will have a tough time punching through overhead resistance
in the 1400 area.

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

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