Short-term Setups Suggest a Down Day Tuesday and a Rebound into the FOMC Announcement

TICKscore settled at -15, cumulative TICK -77,000. Breadth was negative at
better than 2:1 on the NASDAQ and nearly 2:1 on the NYSE. It’s unusual to see
NYSE breadth come in nearly 2:1 in favor of declining issues on a day when the
S&P500 closes higher. Historically, it’s breadth that’s the better tell, and
the S&P will normally reverse course and trade lower the following session to
play ‘catch-up’. There have been a total of 24 instances since 1988 in which
the advance/decline ratio closed under .60 on a day when the S&P closed
higher. In 19 cases out of 24 cases, or 79% of the time, the S&P closed lower
the following session, significantly above the 47% at-any-time odds of a lower
S&P close one day later…

NYSE Adv/Dec Ratio <.60 on Up Day for S&P500
06/23/08 .50… S&P ??? next day
06/09/08 .56… S&P -0.2% next day
12/13/07 .51… S&P -1.4% next day
03/23/05 .28… S&P -0.1% next day
02/18/05 .58… S&P -1.5% next day
04/23/04 .53… S&P -0.5% next day
01/29/04 .59… S&P -0.3% next day
08/04/03 .56… S&P -1.8% next day
09/10/01 .58… S&P -4.9% next day
10/18/99 .57… S&P +0.6% next day
09/16/99 .44… S&P +1.3% next day
05/17/99 .54… S&P -0.5% next day
07/27/98 .46… S&P -1.5% next day
06/12/98 .59… S&P -2.0% next day
04/03/97 .58… S&P +1.0% next day
03/17/97 .51… S&P -0.8% next day
06/07/96 .37… S&P -0.2% next day
03/06/95 .54… S&P -0.7% next day
01/23/95 .59… S&P +0.0% next day
10/25/94 .57… S&P +0.2% next day
04/19/94 .50… S&P -0.1% next day
03/31/94 .49… S&P -1.5% next day
03/02/94 .56… S&P -0.4% next day
03/15/91 .55… S&P -0.4% next day
04/15/88 .58… S&P -0.2% next day

Also not a positive sign to see the S&P close higher in the face of another
sharp selloff in the banking sector. There have been a total of fifteen
instances since the inception of the BKX in which the S&P500 closed higher on
the same day that the Bank Index fell 2% or more. Note that in every case but
one, the S&P posted a subsequently lower close two or three sessions later…

BKX Settles Down 2%+, SPX Closes Higher
06/23/08… S&P500 ???
06/09/08… S&P500 -1.9% two sessions later
05/16/08… S&P500 -0.8% two sessions later
04/04/08… S&P500 -0.4% two sessions later
10/05/01… S&P500 -1.4% two sessions later
11/15/00… S&P500 -1.6% two sessions later
06/30/00… S&P500 -0.6% two sessions later
06/21/00… S&P500 -2.5% two sessions later
06/15/00… S&P500 -0.2% three sessions later
04/27/00… S&P500 -1.3% three sessions later
02/17/00… S&P500 -2.6% two sessions later
01/10/00… S&P500 -1.7% two sessions later
09/27/99… S&P500 -1.2% two sessions later
08/25/99… S&P500 -2.4% two sessions later
10/21/98… S&P500 +0.2% three sessions later
05/27/97… S&P500 -0.7% two sessions later

These setups point to the potential for further weakness, particularly on
Tuesday. Beyond Tuesday, there are signs that we could see the market
stabilize. At Tuesday’s close, the short-term positive ‘seasonal’ cycle
related to Wednesday’s FOMC announcement goes into effect (until 2pm ET
Wednesday). Additionally, Monday’s negative breadth statistics sent the NYSE
McClellan Oscillator into extreme oversold territory (below -200), a sign the
market is most likely nearing a short-term bottom. As I noted in my June 11th
commentary when this setup was last triggered, the S&P is typically trading
higher three sessions after a McClellan reading below -200.

Also noteworthy is the fact that big board volume was unusually light Monday,
with just over a billion shares trading hands on the NYSE. That’s the lightest
volume session in over a month, despite the fact that breadth closed
essentially 2:1 in favor of declining issues. Officially it just missed
registering as a true 2:1 day, but nonetheless volume was unusually light
considering the lopsided conditions. Historically, when breadth closes 2:1 in
favor of declining issues and big board volume hits a three-week low, it’s a
sign of limited downside potential over the short-term. Listed below are each
of the last thirty occurrences, along with the performance of the S&P500 over
the next 2-3 trading days. Note that in 25 out of 30 cases stretching back to
1988, the S&P500 closed at a higher level 2-3 trading days later, Also
noteworthy is that even on the five occasions this setup was proved wrong, the
largest loss amounted to a small 0.6% drop for the S&P, suggesting downside
potential is likely to be contained heading into Wednesday’s FOMC
announcement.

NYSE Breadth 2:1 Negative, Volume at Three-Week Low
08/27/07… S&P500 -0.6% three sessions later (*)
03/27/07… S&P500 -0.5% three sessions later (*)
06/19/06… S&P500 +1.0% two sessions later
04/08/05… S&P500 +0.6% two sessions later
11/11/02… S&P500 +0.7% two sessions later
08/02/02… S&P500 +1.5% three sessions later
05/06/02… S&P500 +3.4% two sessions later
03/25/02… S&P500 +1.1% two sessions later
07/26/99… S&P500 +1.3% two sessions later
02/12/99… S&P500 +0.6% three sessions later
09/17/98… S&P500 +0.5% two sessions later
08/10/98… S&P500 +0.1% two sessions later
05/18/98… S&P500 +1.2% two sessions later
07/05/96… S&P500 -0.2% three sessions later (*)
11/11/94… S&P500 +0.6% two sessions later
05/09/94… S&P500 +0.3% three sessions later
03/21/94… S&P500 -0.0% two sessions later (*)
04/29/91… S&P500 +1.8% two sessions later
02/26/91… S&P500 +1.2% two sessions later
02/20/91… S&P500 +0.1% two sessions later
12/17/90… S&P500 +1.3% two sessions later
08/30/90… S&P500 +1.4% two sessions later
08/10/90… S&P500 +1.2% two sessions later
07/05/90… S&P500 +1.1% two sessions later
02/12/90… S&P500 +0.6% two sessions later
11/20/89… S&P500 +0.8% two sessions later
09/25/89… S&P500 +0.3% two sessions later
08/21/89… S&P500 +1.2% two sessions later
08/14/89… S&P500 +0.8% two sessions later
11/07/88… S&P500 -0.1% three sessions later (*)

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

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