Volume Contracts Significantly on a Solid Down Day, a Bullish Development

Stock indexes settled with solid losses Monday. The semiconductor index (SOX)
closed in new lows for the year after providing a good heads up last Friday
when it failed to keep up with the Nasdaq's advance. Decliners topped
advancers by more than a 2:1 margin on both the NYSE and NASDAQ, and NYSE TICK
action was negative. TICKscore closed at -9, Cumulative TICK -56,000. Note,
however, that the 20-day moving average of the Cumulative TICK remains in a
general uptrend as it continues to work off the very weak readings from late
June.

Volume associated with declining issues accounted for nearly 80% of total
volume on the NYSE. That just missed triggering a short-term 1-2 day buy setup
(see my July 24th column from last year for details).

In Sunday's column I noted that while the SOX/NDX setup pointed to the
potential for lower prices early this week, I wanted to remain on watch for an
absence of meaningful selling pressure given the positive intermediate-term
setups on the board. And that's basically what we saw Monday, as stocks
skidded lower on very light volume.

The S&P500 tracking stock (SPY) closed lower for a third consecutive session
on successively lighter volume, a very rare occurrence. Consider that there
have been 213 separate instances since 1993 in which the SPY initially posted
three consecutive lower closes. In only 8 of those 213 cases, or less than 5%
of the time, did SPY volume contract on each of the three down days. Given
that SPY is heavily traded by institutions, we can infer that there hasn't
been much institutional participation during this latest selloff, a positive
sign lookout out towards the end of the week...

SPY Down Three on Successively Lighter Volume
07/28/08... SPY ??? three days later
09/24/07... SPY +0.9% three days later
11/11/02... SPY +2.8% three days later
06/26/01... SPY +0.9% three days later
11/20/00... SPY +0.1% three days later
06/18/96... SPY +0.7% three days later
03/21/96... SPY +0.6% three days later
10/07/93... SPY +0.5% three days later
07/19/93... SPY -0.5% three days later

Big board volume hit a three-week low Monday, noteworthy given that it
coincided with a 2:1 negative breadth day. The table below lists the last
thirty occurrences in which breadth on the NYSE came in 2:1 or better in favor
of declining issues and big board volume hit a three-week low. Following the
date is 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, suggesting good odds we'll see the S&P
close back over today's settlement of 1234 in the Wednesday-Thursday time
frame...

NYSE Breadth 2:1 Negative, Volume at Three-Week Low
07/28/08... S&P500 ???
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

Monday's volume also triggered a buy setup with a slightly longer time frame.
When big board volume is light (below its 20-day average) on a solid down day
for the S&P like we saw Monday (over 1.5% with 2:1 negative breadth), it's
usually a positive sign looking out one week. The market has a tendency to
bottom out over the short-term and ultimately close higher five trading days
later. The last thirty instances in which NYSE volume remained below its 20-
day average on a 1.5%+ down day for the S&P (with at least 2:1 negative
breadth) are listed in the table below. Note that in 22 out of 30 cases, or
73% of the time, the S&P was trading at a higher level one week later,
significantly better than the 54% at-any-time odds...

S&P500 -1.5%, Breadth 2:1 Neg, Volume Below 20-day Avg
07/28/08... S&P500 ??? one week later
05/07/08... S&P500 +1.2% one week later
04/11/08... S&P500 +4.3% one week later
02/05/08... S&P500 +0.9% one week later
12/17/07... S&P500 +3.5% one week later
11/26/07... S&P500 +4.6% one week later
11/21/07... S&P500 +3.7% one week later
09/07/07... S&P500 +2.1% one week later
08/28/07... S&P500 +2.8% one week later
08/14/07... S&P500 +1.4% one week later
06/05/06... S&P500 -2.3% one week later
05/30/06... S&P500 +0.3% one week later
08/05/04... S&P500 -1.6% one week later
08/05/03... S&P500 +2.6% one week later
05/19/03... S&P500 +3.3% one week later
03/24/03... S&P500 -1.9% one week later
03/10/03... S&P500 +6.9% one week later
02/24/03... S&P500 +0.3% one week later
12/27/02... S&P500 +6.1% one week later
12/09/02... S&P500 +2.1% one week later
11/11/02... S&P500 +2.8% one week later
10/16/02... S&P500 +4.2% one week later
09/12/02... S&P500 -4.9% one week later
08/28/02... S&P500 -4.2% one week later
08/23/02... S&P500 -2.6% one week later
08/13/02... S&P500 +6.0% one week later
08/02/02... S&P500 +5.1% one week later
05/06/02... S&P500 +2.1% one week later
03/20/02... S&P500 -0.6% one week later
02/19/02... S&P500 +2.4% one week later
12/10/01... S&P500 -0.5% one week later

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

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