S&P Futures Fall 2%, But Still Trading above Five-day Ago Close

Stock indices settled with solid losses Thursday. Breadth ended 4:1 in favor
of decliners, sending the NYSE McClellan Oscillator back under +100 and
closing out the short-term sell setup mentioned in Wednesday's column. Big
board volume was relatively light considering the steep drop, coming in below
Wednesday's level. That triggers a short-term bullish setup because low-volume
selloffs are not usually sustainable, at least for the short-term, and the S&P
invariably bounces within the next few days. The last thirty times we've seen
NYSE volume decline on a 3:1 or better negative breadth day are listed in the
table below. Note that in 28 out of 30 cases, or 93% of the time, the S&P
posted a subsequently higher close within three trading days, significantly
better than the 72% at-any-time odds...

NYSE Decliners 3:1 over Advancers, NYSE Volume Down
07/24/08... ???
04/11/08... Higher SPX close two sessions later
03/10/08... Higher SPX close one session later
03/06/08... Higher SPX close three sessions later
02/14/08... Higher SPX close one session later
12/14/07... Higher SPX close five sessions later
11/19/07... Higher SPX close one session later
11/15/07... Higher SPX close one session later
11/05/07... Higher SPX close one session later
05/10/07... Higher SPX close one session later
03/02/07... Higher SPX close two sessions later
01/05/07... Higher SPX close one session later
04/07/06... Higher SPX close one session later
08/05/05... Higher SPX close two sessions later
07/17/03... Higher SPX close one session later
06/23/03... Higher SPX close one session later
03/24/03... Higher SPX close one session later
03/10/03... Higher SPX close three sessions later
01/27/03... Higher SPX close one session later
10/09/02... Higher SPX close one session later
10/07/02... Higher SPX close one session later
09/19/02... Higher SPX close one session later
08/05/02... Higher SPX close one session later
07/22/02... Higher SPX close two sessions later
09/20/01... Higher SPX close two sessions later
09/18/00... Higher SPX close one session later
02/18/00... Higher SPX close one session later
05/14/99... Higher SPX close one session later
10/05/98... Higher SPX close five sessions later
07/23/98... Higher SPX close one session later
06/15/98... Higher SPX close one session later

TICKscore settled at -17, Cumulative TICK -78,000. Still, note that the 20-day
average of the cumulative TICK remains in an uptrend for the time being,
suggesting it's premature to call an end to the recent rally phase.

While the September S&P's settled down over 2%, note that the futures are
still trading above the five-day ago close. That's a potentially telling
development. There have been plenty of 2%+ down days over the past 25 years,
but not many that still leave the S&P up over the past week. There have been
16 separate occurrences since 1980 in which the front-month S&P contract fell
2%+ and remained above its five-day ago close (an additional qualifier is that
the setup hadn't been triggered at any point within the last two weeks). Out
of those 16 occurrences, all but two led to a higher S&P two weeks later as
the underlying uptrend reasserted itself over the intermediate-term.

S&P Futures -2%, Up Compared to Five-Days Ago
12/11/07... S&P futures +1.4% two weeks later
03/24/03... S&P futures +1.6% two weeks later
11/07/02... S&P futures +3.7% two weeks later
10/16/02... S&P futures +3.2% two weeks later
08/23/02... S&P futures -4.3% two weeks later
08/01/02... S&P futures +5.3% two weeks later
03/28/01... S&P futures +1.2% two weeks later
10/25/00... S&P futures +2.9% two weeks later
09/09/98... S&P futures +6.4% two weeks later
05/07/97... S&P futures +3.1% two weeks later
12/10/87... S&P futures +7.8% two weeks later
10/26/87... S&P futures +11.5% two weeks later
04/07/87... S&P futures -3.4% two weeks later
01/23/87... S&P futures +4.4% two weeks later
02/01/83... S&P futures +4.3% two weeks later
06/14/82... S&P futures +3.4% two weeks later

Most intermediate-term bullish setups will remain on the board until at least
early August, but from a 'big picture' perspective, keep in mind that this
does appear to be a bottoming process within the context of a larger, and
still unfolding decline. One that may persist for years. It's interesting to
note that the very long-term trendline channel seen on this logarithmic chart
of the S&P may actually come into play again later this year or early next
year. It's been a while since I've discussed this chart, but briefly the
trendline channel has contained the market's entire long-term uptrend since
the 1930's. That is, until 1995, when the market went into bubble mode
(earlier than many realize) by breaking above the upper channel. We've been in
this bubble mode ever since, with the S&P coming right down to test the upper
channel in 2002 but importantly not falling back into the channel. Currently
the upper channel lies in the SPX 1100 area, a level that must hold from a
'big picture' perspective. Failure to hold that level would suggest the S&P
will then find resistance at that upper channel line, and ultimately test the
lower end of the trading range in the SPX 600 range. That's a doomsday
scenario, but one that isn't out of the realm of possibility. One indicator
I'll be watching closely if & when we eventually test the SPX 1100 area is the
long-term last hour chart. Recall this compares the market's performance
during the first & last hour of every trading day, and is considered a long-
term lead indicator for stocks. From 2005 - 2007, this indicator plunged much
the way it did in 2000, a major red flag from a big picture perspective. As
I've noted numerous times in the past, following such declines in the
indicator, the real time frame to watch out for is the retracement period when
the Last Hour pushes higher, recouping the gains from the earlier drop.
Because this is such a lead indicator, it's usually at that time that the
market experiences some of its worst performance as smart money buys back into
the ensuing weakness. Note how this occurred throughout 2001-2003, with the
market not bottoming out until the Last Hour had retraced the entire 2000
selloff. It's on its way higher again currently, but has a long, long way to
go before it reaches its old highs. If the SPX eventually tests 1100 and the
Last Hour is still nowhere near its late '04 top, which looks likely at this
point, it would imply that upper trendline channel will not hold.

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

 Print This Post