Intraday Recovery on Light Volume and Poor Breadth Triggers Short-term Sell Setups

Stock indexes once again finished mixed Friday after a late-day rally lifted
the S&P into positive territory. Despite the higher close, market internals
remained negative. TICKscore settled at -4, cumulative TICK -25,000. New 52-
week lows more than doubled on the NYSE, the VXO closed up 7% and breadth
settled in 2:1 negative territory despite the afternoon rebound. It's unusual
to see anywhere close to 2:1 negative breadth (0.50 advance/decline ratio) on
a day when the S&P500 settles higher. Historically, when the market has
managed to rally on a day with a closing advance/decline ratio of .60 or
lower, it's breadth that's the better tell, and the market will usually
reverse course and trade lower the following session. Out of 26 occurrences
over the past two decades, the S&P closed lower the following session 21
times. That 84% win rate is significantly above the 47% at-any-time odds for a
lower S&P close one day later...

NYSE Adv/Dec Ratio <.60 on Up Day for S&P500
09/26/08 .50... S&P ??? next day
07/03/08 .53... S&P -0.8% next day
06/23/08 .51... S&P -0.3% next day
06/09/08 .55... S&P -0.2% next day
12/13/07 .51... S&P -1.4% next day
03/23/05 .28... S&P -0.1% next day
02/18/05 .58... S&P -1.5% next day
04/23/04 .53... S&P -0.5% next day
01/29/04 .59... S&P -0.3% next day
08/04/03 .56... S&P -1.8% next day
09/10/01 .58... S&P -4.9% next day
10/18/99 .57... S&P +0.6% next day
09/16/99 .44... S&P +1.3% next day
05/17/99 .54... S&P -0.5% next day
07/27/98 .46... S&P -1.5% next day
06/12/98 .59... S&P -2.0% next day
04/03/97 .58... S&P +1.0% next day
03/17/97 .51... S&P -0.8% next day
06/07/96 .37... S&P -0.2% next day
03/06/95 .54... S&P -0.7% next day
01/23/95 .59... S&P +0.0% next day
10/25/94 .57... S&P +0.2% next day
04/19/94 .50... S&P -0.1% next day
03/31/94 .49... S&P -1.5% next day
03/02/94 .56... S&P -0.4% next day
03/15/91 .55... S&P -0.4% next day
04/15/88 .58... S&P -0.2% next day

As mentioned earlier, the VXO settled with a solid gain Friday despite the
S&P's afternoon charge into positive territory. That's a generally negative
indication for the short-term. When the volatility index increases on a day
when it ostensibly shouldn't, it's a short-term red flag for stocks. The table
below lists each of the last thirty instances in which the VXO closed up 5% or
more on a day when the S&P settled higher. Note that in 24 out of 30 cases, or
80% of the time, the S&P posted a subsequently lower close within the next two
sessions...

VXO +5% or more, S&P Closes Higher
09/26/08... S&P500 ???
09/12/08... S&P500 -4.7% one session later
08/10/07... S&P500 -0.1% one session later
07/05/07... S&P500 +0.4% two sessions later
09/27/06... S&P500 -0.1% two sessions later
11/23/05... S&P500 -0.6% two sessions later
09/01/05... S&P500 -0.3% one session later
12/20/04... S&P500 +1.3% two sessions later
11/12/04... S&P500 -0.0% one session later
10/29/04... S&P500 +0.0% two sessions later
10/11/04... S&P500 -0.2% one session later
06/01/04... S&P500 -0.4% two sessions later
12/30/03... S&P500 -0.1% two sessions later
12/18/03... S&P500 -0.1% one session later
11/27/02... S&P500 -0.3% one session later
03/24/00... S&P500 -0.2% one session later
03/23/00... S&P500 -0.2% two sessions later
12/30/99... S&P500 -0.6% two sessions later
05/12/99... S&P500 -1.9% two sessions later
07/13/98... S&P500 +0.8% two sessions later
03/20/98... S&P500 -0.3% one session later
02/17/98... S&P500 +0.5% two sessions later
05/27/97... S&P500 -0.3% one session later
05/14/97... S&P500 -0.8% two sessions later
05/05/97... S&P500 -0.3% one session later
03/17/97... S&P500 -0.8% one session later
11/25/96... S&P500 -0.1% one session later
11/20/96... S&P500 -0.2% one session later
11/15/96... S&P500 -0.1% one session later
09/03/96... S&P500 -0.8% two sessions later
05/09/96... S&P500 +2.5% two sessions later

Also noteworthy that NYSE volume declined on Friday despite the volatile
session. When the S&P trades down over 1% intraday and then reverses to close
higher on the session, it typically coincides with stepped-up volume. Friday's
session lacked that kind of institutional participation. The table below notes
the last thirty instances in which the S&P traded in a similar manner - down
1% intraday, up at the close, all on lower NYSE volume. Note the definitive
tendency for the S&P to post a subsequently lower close over the short-term.
In 24 out of 30 occurrences stretching back to 1999, the S&P closed at a lower
level 2-3 sessions later. That 80% win rate is significantly better than the
59% at-any-time odds of a lower S&P close 2-3 days later...

S&P -1% intraday, closes positive, volume down
09/26/08... ???
09/11/08... S&P500 -4.5% two sessions later
09/05/08... S&P500 -1.4% two sessions later
02/22/08... S&P500 +2.0% three sessions later
12/13/07... S&P500 -2.9% two sessions later
11/02/07... S&P500 -2.3% three sessions later
08/10/07... S&P500 -1.9% two sessions later
07/28/04... S&P500 +1.0% three sessions later
08/04/03... S&P500 -1.6% two sessions later
07/01/03... S&P500 +2.3% three sessions later
10/18/02... S&P500 +1.3% three sessions later
09/16/02... S&P500 -2.4% two sessions later
09/09/02... S&P500 -1.8% three sessions later
08/26/02... S&P500 -3.2% two sessions later
08/09/02... S&P500 -2.7% two sessions later
07/03/02... S&P500 -0.1% three sessions later
06/27/02... S&P500 -2.2% two sessions later
06/24/02... S&P500 -1.9% two sessions later
05/01/02... S&P500 -1.2% two sessions later
10/05/01... S&P500 -1.4% two sessions later
09/10/01... S&P500 -5.5% two sessions later
08/16/01... S&P500 -0.9% two sessions later
08/10/01... S&P500 -0.3% two sessions later
05/04/01... S&P500 -0.4% two sessions later
02/22/00... S&P500 -1.4% three sessions later
10/18/99... S&P500 +2.4% three sessions later
10/01/99... S&P500 +3.3% three sessions later
09/16/99... S&P500 -0.8% three sessions later
05/17/99... S&P500 -0.1% three sessions later
05/12/99... S&P500 -1.9% two sessions later
05/05/99... S&P500 -0.2% two sessions later

The short-term setups above suggest the market will have a difficult time
sustaining a rally early this coming week, meaning any upside gap due to news
on the bailout front could prove to be a selling opportunity.

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

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