Low-Volume Selloff a Bullish Sign For the Coming Week

The S&P500 settled sharply lower Thursday, relieving the technically
overbought conditions in effect over the last couple of sessions. The
McClellan Oscillator fell to +59 as declining issues outpaced advancers by
more than a 3:1 margin on the NYSE. But over on the NASDAQ exchange,
conditions weren't nearly as negative. The Nasdaq100 posted higher highs and
higher lows, settling down only 0.8% as gains in the semiconductor sector (SOX
+1.5%) provided a boost. That's a potentially telling development for the
short-term.

Historically, the ability of the NDX to shrug off weak breadth statistics (at
least 3:2 negative) and post what some technicians call a 'rally day' (higher
highs, higher lows) has been a bullish sign short-term. Each of the last
thirty instances of an NDX 'rally day' with at least 3:2 negative breadth is
listed in the table below, along with the performance of the Nasdaq100 over
the next two sessions...

NDX Higher High & Higher Low Despite 3:2 Neg Breadth
08/07/08... NDX ??? two sessions later
06/17/08... NDX +0.5% two sessions later
03/19/08... NDX +5.8% two sessions later
02/28/08... NDX -3.4% two sessions later
02/21/08... NDX +1.1% two sessions later
10/30/07... NDX -0.5% two sessions later
09/24/07... NDX +1.5% two sessions later
07/16/07... NDX +0.5% two sessions later
05/17/07... NDX +1.4% two sessions later
05/14/07... NDX +0.2% two sessions later
11/09/06... NDX +1.6% two sessions later
10/20/06... NDX +0.3% two sessions later
08/09/06... NDX +0.1% two sessions later
07/27/06... NDX +2.1% two sessions later
04/03/06... NDX +1.5% two sessions later
10/20/05... NDX +2.3% two sessions later
07/21/05... NDX -0.5% two sessions later
05/12/05... NDX +1.8% two sessions later
04/08/05... NDX +0.2% two sessions later
01/13/05... NDX +1.8% two sessions later
10/19/04... NDX +2.2% two sessions later
10/13/04... NDX -0.2% two sessions later
10/07/04... NDX -1.2% two sessions later
09/08/04... NDX +2.6% two sessions later
05/07/04... NDX +1.1% two sessions later
03/02/04... NDX +0.6% two sessions later
02/12/04... NDX +0.4% two sessions later
01/22/04... NDX +1.5% two sessions later
08/22/03... NDX +0.4% two sessions later
07/22/03... NDX -0.3% two sessions later
02/26/03... NDX +3.6% two sessions later

Out of the last 30 occurrences, 24 led to a higher NDX close two sessions
later. That 80% win rate is significantly better than the 53% 'at-any-time'
odds of a higher NDX close two sessions later, indicating that when the NDX
manages to hold its own in the face of negative breadth, there's usually
further upside in store on a short-term basis.

Considering that the S&P fell nearly 2% Thursday, volume remained noticeably
subdued. NYSE volume totaled less than 1.3 billion shares, well below the 20-
day moving average. Historically, a solid down day for the S&P (over 1.5% with
2:1 negative breadth) means elevated volume. When this isn't the case, the
market has a tendency to bottom out over the short-term and ultimately close
higher one week 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...

S&P500 -1.5%, Breadth 2:1 Neg, Volume Below 20-day Avg
08/07/08... S&P500 ??? one week later
07/28/08... S&P500 +1.2% 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

Note that in 23 out of 30 cases, or 77% of the time, the S&P was trading at a
higher level one week later, significantly better than the 54% at-any-time
odds.

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

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