New High/Low Data Fails to Confirm Thursday’s Rally, Plus a Look at Short-term Volatility-based Setups

The Nasdaq/NYSE Volume Ratio settled at a very high 1.83 Thursday, nearly
matching the 1.85 reading from May 5th. Market participation has been very
lopsided recently, with speculators dominating while institutions mostly watch
from the sidelines. While the S&P rallied to a multi-month high on Thursday,
we saw a contraction in new 52-week highs and an expansion of new 52-week lows
on both the NYSE and NASDAQ. That usually means the rally is on shaky ground
short-term, with the S&P typically closing at a subsequently lower level
within the next few sessions. Every instance in which the S&P posted higher
highs, higher lows and a higher close on a day when new 52-week highs
contracted and new lows expanded (on both exchanges) is listed in the table
below...

New Highs Contract, New Lows Expand on SPX Rally Day
05/15/08... ???
04/17/07... Lower S&P close two sessions later
08/03/05... Lower S&P close one session later
02/08/05... Lower S&P close one session later
12/23/04... Lower S&P close one session later
07/30/02... Lower S&P close two sessions later
03/08/02... Lower S&P close three sessions later
07/17/00... Lower S&P close one session later
03/02/00... Lower S&P close three sessions later
08/24/99... Lower S&P close two sessions later
07/13/98... No lower close within three sessions
07/15/97... Lower S&P close three sessions later
06/10/97... No lower close within three sessions
04/16/97... Lower S&P close one session later
12/26/95... Lower S&P close two sessions later
10/19/95... Lower S&P close one session later
07/14/92... Lower S&P close one session later
11/13/91... Lower S&P close one session later
01/18/91... Lower S&P close one session later
03/19/90... Lower S&P close one session later

Note that in 17 of 19 cases, or 89% of the time, the S&P closed at a lower
level within three days, significantly better than the 65% at-any-time odds of
a lower S&P close within the next three days. This implies we'll most likely
see a close below today's settlement of 1423 by next Tuesday at the latest,
and probably sooner.

With the VXO down four consecutive days, it's worth noting that another lower
close for the VXO on Friday would trigger a short-term sell setup for Monday.
The last thirty times that the VXO initially posted five consecutive lower
closes are listed in the table below, along with the S&P500's performance the
following session...

VXO Down Five Consecutive Days
12/24/07... S&P500 +0.1% next session
08/22/07... S&P500 -0.1% next session
06/19/07... S&P500 -1.4% next session
04/04/07... S&P500 +0.3% next session
03/12/07... S&P500 -2.0% next session
12/14/06... S&P500 +0.1% next session
11/20/06... S&P500 +0.2% next session
08/18/06... S&P500 -0.4% next session
01/27/06... S&P500 +0.1% next session
06/15/05... S&P500 +0.4% next session
05/20/05... S&P500 +0.4% next session
04/08/05... S&P500 +0.0% next session
05/24/04... S&P500 +1.6% next session (*)
02/26/04... S&P500 +0.0% next session
01/21/04... S&P500 -0.3% next session
07/02/03... S&P500 -0.8% next session
04/24/03... S&P500 -1.4% next session
01/06/03... S&P500 -0.7% next session
08/19/02... S&P500 -1.4% next session
02/13/02... S&P500 -0.2% next session
12/05/01... S&P500 -0.3% next session
10/03/01... S&P500 -0.3% next session
07/31/01... S&P500 +0.4% next session
04/16/01... S&P500 +1.0% next session (*)
11/17/00... S&P500 -1.8% next session
10/24/00... S&P500 -2.4% next session
02/04/00... S&P500 -0.0% next session
10/22/99... S&P500 -0.6% next session
04/26/99... S&P500 +0.2% next session
12/23/98... S&P500 -0.2% next session

Note that the S&P gained more than 0.4% the following session only two times
out of the last thirty occurrences, while it lost more than 0.4% a total of
nine times.

Nasdaq Volatility (VXN) also posted a fourth consecutive lower close Thursday
and in the process settled in statistically oversold territory (under its
lower bollinger band). A second close under its lower band would indicate VXN
is stretched too far to the downside and likely to bounce higher. Such a
bounce typically means short-term weakness for the Nasdaq. We only have about
seven years of historical VXN data to work with, but in this time we've seen
thirteen cases of two consecutive VXN closes under its lower band. In every
case but one the Nasdaq100 proceeded to post a lower close 2-5 trading days
later. For this setup to be triggered Friday, the VXN needs to settle at 20.01
or lower.

VXN Closes < Lower Band Two Consecutive Days
04/18/08... Lower Nasdaq100 close two sessions later
12/07/07... Lower Nasdaq100 close two sessions later
02/17/06... Lower Nasdaq100 close three days later
04/13/05... Lower Nasdaq100 close two days later
02/02/05... Lower Nasdaq100 close five days later
05/26/04... Lower Nasdaq100 close five days later
01/20/04... Lower Nasdaq100 close two days later
05/22/03... No lower close two-five days later
11/22/02... Lower Nasdaq100 close two days later
10/23/02... Lower Nasdaq100 close three days later
12/28/01... Lower Nasdaq100 close two days later
11/26/01... Lower Nasdaq100 close two days later
06/29/01... Lower Nasdaq100 close two days later

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

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