Dow 2-day RSI Oversold, But Failed Oversold McClellan Setup Signals Caution

TICKscore settled at a low -31 Thursday as institutional buyers were nowhere
in sight. Cumulative TICKscore has been leading the market lower, violating
its March lows back on June 9th. As I noted at the time, this was a “negative
sign from a longer-term perspective as it suggests the S&P will ultimately
follow suit.” While the S&P500 didn’t close in new lows for the year Thursday,
it’s less than 1% away. And the S&P100 (OEX) did settle in new lows.

Cumulative TICK closed at -85,000, keeping the 20-day moving average trending
steadily lower. Still no sign of a bottom from these indicators. Also
noteworthy that the New High-Low Index hasn’t reached oversold territory
despite the steep decline. Readings below 10% often coincide with longer-term
bottoming periods (see my August 8th column from last year). As of Thursday’s
close, it’s still running at 25%.

Today’s selloff produced a notable failure for the short-term McClellan signal
triggered at Monday’s close. That doesn’t bode well for the coming week. The
S&P has dropped more than 0.5% in the three days following a -200 McClellan
reading only seven other times in the last thirty years, but in each case the
S&P was trading at a lower level one week later. When the market can’t rally
when conditions are favorable, it usually means there’s more downside in
store. See my June 11th column for the record.

One setup that points to the likelihood of a near-term bounce is the 2-day RSI
for the Dow Industrials. It closed in extreme oversold territory Thursday,
below 2.0, tilting the odds in favor of a higher close within the next couple
of days. The table below lists the last thirty instances in which the Dow’s 2-
day RSI closed under 2.0, along with the performance of the Dow by the time
the 2-day RSI rose back over 2.0. Note that in 26 out of 30 cases, or 87% of
the time, the Dow was trading at a higher level when the RSI rebounded,
typically within two days of the signal…

Dow 2-Day RSI Closes Under 2.0
06/26/08… Dow ??? when 2-day RSI >2
03/10/08… Dow +3.5% when 2-day RSI >2 (one session)
10/19/07… Dow +0.3% when 2-day RSI >2 (one session)
06/07/07… Dow +1.2% when 2-day RSI >2 (one session)
02/27/07… Dow +0.4% when 2-day RSI >2 (one session)
11/03/06… Dow +1.0% when 2-day RSI >2 (one session)
06/13/06… Dow +1.0% when 2-day RSI >2 (one session)
06/24/05… Dow +1.1% when 2-day RSI >2 (two sessions)
03/22/05… Dow +0.2% when 2-day RSI >2 (three sessions)
01/05/05… Dow +0.2% when 2-day RSI >2 (one session)
10/25/04… Dow +1.4% when 2-day RSI >2 (one session)
05/10/04… Dow +0.3% when 2-day RSI >2 (one session)
03/10/04… Dow -0.5% when 2-day RSI >2 (two sessions)
01/22/03… Dow +0.6% when 2-day RSI >2 (one session)
09/03/02… Dow +1.4% when 2-day RSI >2 (one session)
07/22/02… Dow +5.3% when 2-day RSI >2 (two sessions)
07/16/02… Dow +0.8% when 2-day RSI >2 (one session)
04/29/02… Dow +1.3% when 2-day RSI >2 (one session)
01/14/02… Dow +0.3% when 2-day RSI >2 (one session)
09/17/01… Dow -3.4% when 2-day RSI >2 (five sessions)
10/11/00… Dow -2.1% when 2-day RSI >2 (two sessions)
09/18/00… Dow -0.4% when 2-day RSI >2 (three sessions)
01/28/00… Dow +1.9% when 2-day RSI >2 (one session)
01/24/00… DOw +0.2% when 2-day RSI >2 (one session)
09/24/99… Dow +0.2% when 2-day RSI >2 (one session)
09/16/99… Dow +0.6% when 2-day RSI >2 (one session)
07/26/99… Dow +1.1% when 2-day RSI >2 (one session)
05/25/99… Dow +1.6% when 2-day RSI >2 (one session)
08/31/98… Dow +3.8% when 2-day RSI >2 (one session)
07/23/98… Dow +0.1% when 2-day RSI >2 (one session)
04/28/98… Dow +0.6% when 2-day RSI >2 (one session)

It would be a short-term negative indication if the market doesn’t manage to
bounce Friday and the S&P closes down more than 0.5%. The reasoning is that
volume associated with declining issues accounted for 92% of total big board
volume Friday. Since 1980, we’ve seen a total of 55 separate 90% down volume
sessions, of which only 14 saw the S&P close down more than 0.5% the next
session. When this has occurred, the S&P typically drops another 1%+
(intraday) within the next couple of sessions…

90% Down Volume, SPX Off More Than 0.5% Next Day
03/17/08… SPX +0.0% intraday one session later
03/07/08… SPX -1.6% intraday one session later
02/06/08… SPX -0.7% intraday one session later
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

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

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