Low Volume/Narrow Range Selloff a Positive Sign for the Short-term

The Dow Utilities index closed down over 3% Friday and settled lower again
today at a new 52-week low. The weakness in utilities continues to have long-
term bearish implications for the overall market as they generally lead on the
downside. I mentioned this back in late March when the Utilities Index first
hit a new 52-week low, and recent action suggests that long-term downtrend
remains intact. Of course this doesn't mean the market can't rally over the
intermediate-term, as it did in April, but from a long-term perspective this
isn't a positive sign. Neither is the elevated Nasdaq/NYSE Volume Ratio - note
the 20-day average is holding above 1.50, meaning NASDAQ volume is
consistently running 50% ahead of NYSE volume. Historically this has been a
longer-term red flag for the NASDAQ.

But on a short & intermediate-term basis, I continue to see the potential for
another push higher. Note that the short-term seasonal 'pre-FOMC' setup is in
effect until 2pm ET Tuesday (see my December 10th column for a recent track
record). Also, Monday's session just missed triggering short-term buy setups.
NYSE volume came in at 1.22 billion shares Monday, just above Friday's volume
of 1.21 billion. Had it come in a bit lower, a short-term buy setup would have
been triggered given the market's tendency to rally off of a series of low-
volume down days. While it technically wasn't triggered, I still thought it
worth noting each instance since 1990 in which the S&P closed lower three
consecutive days on successively lighter volume. It's only happened 25 times
since 1990, 21 of which led to a higher S&P close three sessions later...

S&P500 Down Three on Successively Lighter Volume
03/28/08... S&P500 +4.2% two sessions later
12/22/06... S&P500 +1.1% two sessions later
08/08/05... S&P500 +0.5% two sessions later
11/11/03... S&P500 +1.1% two sessions later
11/11/02... S&P500 +0.7% two sessions later
08/05/02... S&P500 +5.1% two sessions later
05/06/02... S&P500 +3.4% two sessions later
12/10/01... S&P500 -0.3% two sessions later
07/26/99... S&P500 +1.3% two sessions later
09/04/98... S&P500 +3.3% two sessions later
03/30/98... S&P500 +1.3% two sessions later
08/25/97... S&P500 -0.7% two sessions later
07/21/97... S&P500 +2.6% two sessions later
04/25/97... S&P500 +3.8% two sessions later
12/16/96... S&P500 +1.5% two sessions later
05/30/95... S&P500 +1.9% two sessions later
11/22/93... S&P500 +0.7% two sessions later
02/09/93... S&P500 +0.5% two sessions later
03/02/92... S&P500 -0.8% two sessions later
12/05/91... S&P500 +0.2% two sessions later
08/09/91... S&P500 +0.7% two sessions later
06/10/91... S&P500 -0.5% two sessions later
04/22/91... S&P500 +0.5% two sessions later
12/17/90... S&P500 +1.3% two sessions later
06/08/90... S&P500 +2.1% two sessions later

Also a positive sign to see SPY volume contract for the third day in a row,
with only 186 million shares trading hands. That's the lightest volume in over
a month, indicating light institutional participation. That's a short-term
positive sign, much as it was back on July 28th when SPY volume also declined
three days as the market traded lower...

SPY Down Three on Successively Lighter Volume
08/04/08... SPY ??? three days later
07/28/08... SPY +2.6% 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

TICKscore closed at -2 Monday, Cumulative TICK at -18,000. Note, however, that
the 20-day moving average of the Cumulative TICK continues to trend higher, a
positive sign for the time being.

Noteworthy that despite nearly 2:1 negative breadth on the NASDAQ exchange,
the Nasdaq100 index traded within an unusually narrow range. Measuring from
the intraday high to the intraday low, the NDX was confined to less than a 24
point range, its smallest range in over two weeks. This creates what's known
as an 'NR10' session, or Narrow Range 10, meaning the range was the smallest
of the last ten sessions. Historically, a lopsided negative breadth day like
we saw Monday doesn't coincide with an NR10 session - the range usually
expands when breadth is this lopsided. When it contracts to its lowest level
in two weeks, as it did Monday, it can be an indication that a change in trend
is nearby. Since 1990, there have only been ten instances in which an NR10 day
coincided with a 2:1 negative breadth session. Each of these instances is
noted in the table below, along with the Nasdaq's performance over the next
three sessions.

Nasdaq NR10 Day & 2:1 Negative Breadth
05/23/08... Nasdaq +3.1% three sessions later
08/11/06... Nasdaq +5.6% three sessions later
07/21/06... Nasdaq +2.5% three sessions later
10/18/05... Nasdaq +1.7% three sessions later
05/10/04... Nasdaq +1.4% three sessions later
04/06/04... Nasdaq +0.2% three sessions later
12/13/02... Nasdaq +0.8% three sessions later
09/05/02... Nasdaq +7.3% three sessions later
08/03/98... Nasdaq -0.2% three sessions later
01/21/92... Nasdaq +5.3% three sessions later

Technically, this setup just missed being triggered Monday as it wasn't quite
a true 2:1 negative breadth day. But like the NYSE volume setup mentioned
earlier, it was so close that I felt it worthy of a mention.

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

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