A Flurry of Short-term Buy Setups Triggered at Today’s Close

Wednesday represented the second 10:1+ negative breadth session and the second
90%+ down volume day in just the last three sessions. Unlike Monday, however,
volume was down from the previous session, and new 52-week lows declined from
the previous session, both of which triggered short-term bullish setups at
Wednesday’s close.

The SPX and NDX hit new 20-day lows Wednesday, yet the number of new 52-week
lows declined on both the NYSE and NASDAQ. That’s usually a positive
development for the short-term. Since the inception of the Nasdaq100 in 1985,
we’ve seen this same pattern occur a total of 30 times, all of which are
listed in the table below. Note that in 28 out of 30 cases, or 93% of the
time, the S&P closed at a subsequently higher level 2-4 trading days later,
significantly greater than the 70% at-any-time odds of a higher S&P 2-4 days
later…

NDX & SPX Hit One-Month Lows, New 52-week Lows Decline
09/17/08… ???
06/12/08… Higher SPX close two sessions later
01/23/08… Higher SPX close three sessions later
01/07/08… Higher SPX close three sessions later
11/12/07… Higher SPX close two sessions later
11/09/07… Higher SPX close two sessions later
07/31/07… Higher SPX close two sessions later
05/18/06… Higher SPX close two sessions later
01/03/06… Higher SPX close two sessions later
08/24/05… Higher SPX close three sessions later
04/18/05… Higher SPX close three sessions later
08/13/04… Higher SPX close two sessions later
07/23/04… Higher SPX close two sessions later
09/29/03… Higher SPX close two sessions later
08/05/03… Higher SPX close two sessions later
12/31/02… Higher SPX close two sessions later
10/08/02… Higher SPX close two sessions later
09/20/02… Higher SPX close four sessions later
09/18/01… No higher SPX close 2-4 sessions later
03/20/01… Higher SPX close four sessions later
12/21/00… Higher SPX close two sessions later
10/13/00… Higher SPX close four sessions later
10/18/99… Higher SPX close two sessions later
09/01/98… Higher SPX close four sessions later
08/28/98… No higher SPX close 2-4 sessions later
06/24/93… Higher SPX close two sessions later
02/17/93… Higher SPX close two sessions later
06/18/92… Higher SPX close two sessions later
06/26/90… Higher SPX close two sessions later
11/11/88… Higher SPX close two sessions later
01/21/88… Higher SPX close two sessions later

Also positive for the near-term is that NYSE volume actually declined from
Tuesday’s level despite the massively lopsided breadth (better than 13:1
negative on the big board). 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
09/17/08… ???
09/09/08… Higher SPX close one session later
08/25/08… Higher SPX close one session later
07/24/08… Higher SPX close one session later
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

I’d also note that Wednesday’s drop in volume has positive implications from
an intermediate-term perspective as well. The reasoning is that the S&P closed
at a fresh 52-week low Wednesday. Right off the bat, that tilts the odds in
favor of higher prices over the intermediate term. Approximately 70% of the
time, the S&P will be trading higher two weeks after a fresh 52-week low. But
it’s particularly interesting when the new closing low is accompanied by a
drop in volume (as was the case Wednesday). The odds of a higher S&P two weeks
later increase significantly in these cases. The last thirty times that the
S&P closed at a new 52-week low on a drop in NYSE volume are listed in the
table below. Note that in 26 cases, or 87% of the time, the new 52-week low
ended up leading to higher prices two weeks later, significantly better than
the 58% at-any-time odds for a higher S&P two weeks later…

SPX Closes at New 52-week Low, NYSE Volume Down
09/17/08… S&P ??? two weeks later
07/14/08… S&P +0.5% two weeks later
07/09/08… S&P +3.0% two weeks later
07/02/08… S&P -0.1% two weeks later
03/10/08… S&P +6.3% two weeks later
03/06/08… S&P +1.9% two weeks later
10/09/02… S&P +15.4% two weeks later
10/07/02… S&P +14.6% two weeks later
07/22/02… S&P +1.8% two weeks later
07/18/02… S&P +0.4% two weeks later
07/16/02… S&P +0.2% two weeks later
09/20/01… S&P +8.6% two weeks later
09/18/01… S&P +1.8% two weeks later
03/09/01… S&P -7.6% two weeks later
02/23/01… S&P -1.0% two weeks later
11/22/00… S&P +1.6% two weeks later
09/24/90… S&P +2.9% two weeks later
08/22/90… S&P +1.2% two weeks later
12/04/87… S&P +11.3% two weeks later
07/24/84… S&P +10.1% two weeks later
07/23/84… S&P +9.2% two weeks later
05/29/84… S&P +1.3% two weeks later
05/23/84… S&P +1.2% two weeks later
08/11/82… S&P +14.6% two weeks later
08/10/82… S&P +12.2% two weeks later
08/06/82… S&P +9.0% two weeks later
08/04/82… S&P +2.3% two weeks later
07/30/82… S&P -3.0% two weeks later
06/21/82… S&P +0.1% two weeks later
03/08/82… S&P +5.1% two weeks later
03/05/82… S&P +1.2% two weeks later

Returning to the short-term, note that the 14-day RSI for the Nasdaq100 closed
in technically oversold territory Wednesday (<30), signaling the Nasdaq is
technically oversold and ripe for a short-term bounce. The last thirty
instances in which the NDX 14-day RSI closed under 30 are listed in the table
below, followed by the date when the RSI closed back over 30 and the
performance of the Nasdaq in this time frame. Note that in 25 out of 30 cases,
or 83% of the time, the oversold condition led to a short-term bounce within
the next two sessions...

Nasdaq100 (NDX) 14-day RSI Closes Under 30
09/17/08... NDX ??? when RSI >30
09/09/08… NDX +1.0% when RSI >30 (one session)
01/22/08… NDX +1.7% when RSI >30 (two sessions)
01/17/08… NDX +0.1% when RSI >30 (one session)
01/08/08… NDX +2.0% when RSI >30 (one session)
06/12/06… NDX +0.7% when RSI >30 (one session)
05/16/06… NDX -1.5% when RSI >30 (seven sessions)
04/15/05… NDX +0.1% when RSI >30 (one session)
01/24/05… NDX +0.7% when RSI >30 (one session)
08/06/04… NDX +0.3% when RSI >30 (one session)
07/02/02… NDX +3.3% when RSI >30 (one session)
05/03/02… NDX +7.7% when RSI >30 (three sessions)
04/29/02… NDX +2.4% when RSI >30 (one session)
09/17/01… NDX -0.3% when RSI >30 (twelve sessions)
09/06/01… NDX +0.3% when RSI >30 (two sessions)
04/03/01… NDX +8.6% when RSI >30 (two sessions)
03/12/01… NDX +6.5% when RSI >30 (one session)
02/28/01… NDX +3.1% when RSI >30 (one session)
10/11/00… NDX +5.7% when RSI >30 (two sessions)
04/14/00… NDX +10.0% when RSI >30 (one session)
08/31/98… NDX +6.6% when RSI >30 (one session)
10/27/97… NDX +7.0% when RSI >30 (one session)
07/15/96… NDX +4.0% when RSI >30 (two sessions)
06/24/94… NDX +2.7% when RSI >30 (one session)
04/13/94… NDX -0.1% when RSI >30 (six sessions)
03/29/94… NDX +1.7% when RSI >30 (four sessions)
02/22/93… NDX +2.9% when RSI >30 (two sessions)
02/16/93… NDX +0.4% when RSI >30 (two sessions)
06/17/92… NDX +1.2% when RSI >30 (two sessions)
04/02/92… NDX +2.2% when RSI >30 (two sessions)
06/24/91… NDX +0.6% when RSI >30 (two sessions)

The heavily lopsided breadth statistics on Monday and Wednesday have sent the
NYSE McClellan Oscillator deep into oversold territory (below -200), usually a
sign that the market is at or near a short- term bottom. The last 30 instances
in which the McClellan initially closed below the -200 level are listed in the
table below, along with the S&P’s performance three trading days later. Note
that in 22 out of 30 cases, or 73% of the time, the S&P closed higher three
sessions later. That’s significantly better than the 54% at-any-time odds of a
higher S&P three days later…

NYSE McClellan Oscillator closes below -200
09/17/08 -263… S&P ??? three days later
07/15/08 -219… S&P +3.8% three days later
06/26/08 -224… S&P +0.1% three days later
06/23/08 -216… S&P -2.6% three days later (*)
06/11/08 -245… S&P +1.8% three days later
03/17/08 -253… S&P +4.1% three days later
03/07/08 -208… S&P +1.2% three days later
11/19/07 -254… S&P +0.5% three days later
11/09/07 -234… S&P +1.2% three days later
11/07/07 -213… S&P -2.5% three days later (*)
08/15/07 -257… S&P +2.8% three days later
08/03/07 -213… S&P +4.5% three days later
07/24/07 -228… S&P -3.4% three days later (*)
06/12/07 -253… S&P +2.7% three days later
06/07/07 -258… S&P +0.2% three days later
03/02/07 -228… S&P +0.3% three days later
05/17/06 -223… S&P -0.6% three days later
04/11/06 -200… S&P -0.1% three days later
10/12/05 -239… S&P +1.1% three days later
03/16/05 -229… S&P -0.4% three days later
01/05/05 -212… S&P +0.5% three days later
05/07/04 -275… S&P -0.1% three days later
04/29/04 -216… S&P +0.5% three days later
04/14/04 -249… S&P +0.7% three days later
02/04/04 -206… S&P +1.2% three days later
07/17/03 -239… S&P +0.6% three days later
06/23/03 -227… S&P +0.4% three days later
01/27/03 -237… S&P -0.3% three days later
10/09/02 -248… S&P +8.3% three days later
09/24/02 -212… S&P +1.0% three days later
07/22/02 -258… S&P +2.3% three days later

The extent of any bounce over the next few sessions will be telling given the
extreme oversold conditions. NYSE volume has remained in statistically ‘out of
bounds’ territory for two consecutive sessions, a pattern that’s often
preceded lower prices short-term (see the end of my September 9th column).
While we have a number of setups in effect calling for generally higher
prices, none rule out the possibility of another lower close in the near-term.
With the McClellan falling below -200 today, the S&P should at least be able
to hold its own heading into Monday. If it can’t and the S&P is trading down
0.5% or more, it would have negative implications from an intermediate-term
perspective. Looking back at times when the short-term oversold McClellan
signal outlined in the table above led to a loss of 0.5% or more, the market
typically remained under pressure over the next week. Every occurrence since
1970 is noted in the table below…

NYSE McClellan <-200, S&P Down 0.5% Three Days Later
06/26/08… S&P500 -1.6% one week later
11/12/07… S&P500 -0.4% one week later
07/27/07… S&P500 -1.8% one week later
05/22/06… S&P500 -0.2% one week later
09/02/98… S&P500 -1.0% one week later
07/31/98… S&P500 -2.8% one week later
10/21/87… S&P500 -9.7% one week later
10/25/78… S&P500 -0.5% one week later

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

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