When the ADX for the S&P500 Reaches 40 in a Downtrend

Cumulative TICK settled at -21,000 Thursday, but note that the 20-day moving
average of the Cumulative TICK continues to trend higher, a positive sign.

The VIX-VXV Ratio hit its highest level in months Thursday at 1.05. That
signals a resurgence of fear in the marketplace that has been noticeably
absent the last few months. We’re not at the 1.10 level that has nicely
correlated with previous market bottoms, but just the fact this ratio is back
over 1.0 is a generally positive sign.

Also positive to see the slight expansion in new 52-week highs Thursday.
Granted, it wasn’t much of an increase, but with the S&P holding less than
1.5% below Wednesday’s high, any increase is noteworthy. Looking back at times
when the SPX didn’t trade within 1.5% of the previous day’s high and new 52-
week highs still managed to expand, it’s usually a positive sign for the
short-term. Out of the last 30 occurrences stretching back to 1999, 22 led to
a higher S&P close two sessions later. That 73% win rate is significantly
above the 52% at- any-time odds for a higher S&P two sessions later…

SPX High 1.5% Below Yesterday’s High, New 52-week Highs Expand
07/10/08… S&P500 ??? two sessions later
06/27/08… S&P500 +0.5% two sessions later
04/14/08… S&P500 +2.7% two sessions later
03/03/08… S&P500 +0.2% two sessions later
01/22/08… S&P500 +3.2% two sessions later
11/02/07… S&P500 +0.7% two sessions later
08/06/04… S&P500 +1.4% two sessions later
04/10/03… S&P500 +1.6% two sessions later
03/04/03… S&P500 +0.0% two sessions later
11/11/02… S&P500 +0.7% two sessions later
10/07/02… S&P500 -1.1% two sessions later
09/30/02… S&P500 +1.6% two sessions later
09/04/02… S&P500 +0.1% two sessions later
08/05/02… S&P500 +5.1% two sessions later
07/18/02… S&P500 -7.0% two sessions later
07/10/02… S&P500 +0.1% two sessions later
06/21/02… S&P500 -1.3% two sessions later
09/07/01… S&P500 -4.3% two sessions later
06/15/01… S&P500 -0.2% two sessions later
04/04/01… S&P500 +2.3% two sessions later
03/01/01… S&P500 +0.0% two sessions later
01/08/01… S&P500 +1.3% two sessions later
12/21/00… S&P500 +3.2% two sessions later
12/14/00… S&P500 -1.4% two sessions later
10/11/00… S&P500 +0.7% two sessions later
05/22/00… S&P500 -0.1% two sessions later
05/04/00… S&P500 +1.1% two sessions later
02/22/00… S&P500 +0.1% two sessions later
01/05/00… S&P500 +2.8% two sessions later
10/14/99… S&P500 -2.3% two sessions later
05/17/99… S&P500 +0.4% two sessions later

Interesting to note that the 14-day ADX for the S&P500 hit the 40 level
Thursday, a fairly extreme reading from a historical perspective (see long-
term chart). ADX gauges the strength of the underlying trend. A reading of 40
or higher indicates an unusually persistent trend, and when it coincides with
a downtrend, it often means the downtrend has just about run its course. Since
1970, there have been 26 instances in which the ADX hit 40 or higher when the
-DI component was greater than +DI (-DI & +DI are separate components of the
ADX indicator. When +DI is above -DI, the trend is considered positive, when
it’s below the trend is negative). Each of these occurrences is noted in the
table below, along with the S&P’s performance one month later. Note that in 22
out of 26 cases, or 85% of the time, the S&P was trading at a higher level one
month later, significantly above the 59% at-any-time odds of a higher S&P one
month later…

ADX for S&P500 Hits 40 In Downtrend
07/10/08… S&P500 ??? one month later
07/17/02… S&P500 +1.5% one month later
09/20/01… S&P500 +8.5% one month later
03/21/01… S&P500 +11.7% one month later
10/18/00… S&P500 +3.6% one month later
08/28/98… S&P500 +2.1% one month later
12/11/96… S&P500 +2.5% one month later
07/30/96… S&P500 +4.9% one month later
05/11/94… S&P500 +3.7% one month later
04/05/94… S&P500 +0.8% one month later
09/21/90… S&P500 +0.4% one month later
08/17/90… S&P500 -3.1% one month later
12/01/87… S&P500 +6.9% one month later
10/23/87… S&P500 -2.5% one month later
04/04/86… S&P500 +2.7% one month later
06/13/85… S&P500 +4.3% one month later
02/23/84… S&P500 +1.6% one month later
09/18/81… S&P500 +2.5% one month later
03/26/80… S&P500 +5.8% one month later
10/29/79… S&P500 +5.6% one month later
09/05/79… S&P500 +3.0% one month later
11/08/78… S&P500 +2.8% one month later
12/03/73… S&P500 +4.0% one month later
12/20/72… S&P500 +2.0% one month later
08/10/71… S&P500 +8.3% one month later
05/01/70… S&P500 -6.0% one month later
04/06/70… S&P500 -10.6% one month later

(On a side note, the ADX chart, along with the McClellan Summation and Breadth
Thrust indicators will be put back into the nightly rotation starting this
weekend.)

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

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