S&P Inside Day and NR10 Bar After Three Up Days Point to Lower Prices over the Near-term

The S&P500 held to a very tight 6-point range Friday, the smallest range day
of the year. As I noted the last time this occurred in late April, it's
generally a short-term negative sign when an NR10 bar appears after a short-
term rally. In the table below are the last thirty instances in which the S&P
posted its narrowest range day of the past ten sessions (NR10) immediately
following three consecutive higher closes (as was the case Friday). Note that
in 28 out of 30 cases, or over 90% of the time, the S&P posted a subsequently
lower close within the next three days...

SPX NR10 Bar Following Three Up Days
05/30/08... ???
04/28/08... Lower SPX close one session later
04/08/08... Lower SPX close one session later
03/26/08... Lower SPX close one session later
12/26/07... Lower SPX close one session later
12/03/07... Lower SPX close one session later
09/14/07... Lower SPX close one session later
07/09/07... Lower SPX close one session later
06/18/07... Lower SPX close two sessions later
05/07/07... Lower SPX close one session later
04/09/07... Lower SPX close two sessions later
03/22/07... Lower SPX close three sessions later
02/02/07... Lower SPX close one session later
01/16/07... Lower SPX close one session later
10/24/06... Lower SPX close three sessions later
09/28/06... Lower SPX close one session later
08/21/06... Lower SPX close two sessions later
03/17/06... Lower SPX close one session later
02/17/06... Lower SPX close one session later
11/25/05... Lower SPX close one session later
09/30/05... Lower SPX close one session later
07/13/05... Lower SPX close three sessions later
05/19/05... Lower SPX close one session later
12/23/04... Lower SPX close one session later
11/08/04... Lower SPX close one session later
11/01/04... No lower close within three sessions
09/14/04... Lower SPX close one session later
07/30/04... Lower SPX close two sessions later
05/28/04... Lower SPX close three sessions later
05/26/04... No lower close within three sessions
04/06/04... Lower SPX close one session later

Heading into Friday's session, S&P futures had posted three straight days of
higher closes and three white candlesticks. That means not only did the S&Ps
close higher three days in a row, but the close was greater than the open each
day. While the S&Ps managed to post yet another higher settlement on Friday,
note that the close was below the open, creating a black candlestick as a
result. Looking back at times when S&P futures formed a similar pattern of
three rally days (higher closes, white candles) followed by a fourth higher
close that coincided with a black candle, we can see that the settlement below
the open typically ushers in a very short-term change of trend. Since 1995
we've seen this specific pattern a total of sixteen times, only one of which
led to a meaningful gain the following session...

Higher Close, Black Candle After Three Rally Days
05/30/08... S&P futures ??? next session
11/30/07... S&P futures -0.6% next session
04/09/07... S&P futures +0.1% next session
11/16/06... S&P futures -0.0% next session
09/15/06... S&P futures +0.2% next session
04/21/06... S&P futures -0.2% next session
03/17/06... S&P futures -0.2% next session
07/14/05... S&P futures -0.0% next session
11/01/04... S&P futures -0.0% next session
05/28/03... S&P futures -0.3% next session
10/20/98... S&P futures -0.1% next session
01/30/98... S&P futures +1.6% next session (*)
06/16/97... S&P futures -0.2% next session
12/20/96... S&P futures -0.4% next session
05/15/96... S&P futures -0.1% next session
02/07/95... S&P futures -0.1% next session
01/27/95... S&P futures -0.3% next session

This tells us to be on the lookout for a lower close Monday, although I'd note
that downside potential is typically limited to only about one third of one
percent. While 13 out of 16 occurrences led to a lower close the following
session, the largest loss was only 0.6%.

Interestingly, the same candlestick pattern discussed above has positive
implications when the time frame is expanded from one session to three. Here's
the same table as above except in this case we look at where the S&P is
trading three sessions later. Note that the three-day performance is a mirror
image of the next-day performance, with the market rallying in the majority of
cases...

Higher Close, Black Candle After Three Rally Days
05/30/08... S&P futures ??? three sessions later
11/30/07... S&P futures +0.2% three sessions later
04/09/07... S&P futures +0.1% three sessions later
11/16/06... S&P futures +0.1% three sessions later
09/15/06... S&P futures +0.3% three sessions later
04/21/06... S&P futures -0.6% three sessions later
03/17/06... S&P futures -0.2% three sessions later
07/14/05... S&P futures +0.1% three sessions later
11/01/04... S&P futures +2.6% three sessions later
05/28/03... S&P futures +1.7% three sessions later
10/20/98... S&P futures +0.0% three sessions later
01/30/98... S&P futures +2.2% three sessions later
06/16/97... S&P futures +0.4% three sessions later
12/20/96... S&P futures +1.0% three sessions later
05/15/96... S&P futures +1.3% three sessions later
02/07/95... S&P futures +0.1% three sessions later
01/27/95... S&P futures +0.1% three sessions later

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

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