When the Nasdaq100 Closes Under its Lower Bollinger Band Two Consecutive Sessions

The Nasdaq100 shed nearly 1% Wednesday to close at 1833, while the Nasdaq
Volatility Index also declined a little over 1%, failing to trigger the short-
term buy setup discussed in Tuesday’s column. However, it’s noteworthy that
the NDX did settle below its lower bollinger band. That means today’s
settlement was more than two standard deviations below the 20-day moving
average, indicating the Nasdaq could be approaching intermediate-term oversold
territory. Key will be whether we see a second close in statistically oversold
territory on Thursday. If so, odds would tilt in favor of a higher Nasdaq
three weeks later. The table below lists each of the last thirty separate
occurrences in which the NDX closed under its lower bollinger band on back-to-
back sessions, along with the performance of the Nasdaq over the next three
weeks. Note that this has been a good indication that selling pressure is
approaching an intermediate-term exhaustion point. The Nasdaq has closed
higher three weeks later in 26 out of 30 cases, or 87% of the time,
significantly better than the 55% at-any-time odds of a higher NDX three weeks
later. For this setup to be triggered Thursday, the NDX needs to close at
1828.30 or lower, about five points below today’s settlement.

NDX Closes Under its Lower Band Two Days in a Row
03/07/08… Nasdaq100 +4.4% three weeks later
01/07/08… Nasdaq100 -7.7% three weeks later
11/09/07… Nasdaq100 +1.6% three weeks later
08/16/07… Nasdaq100 +6.1% three weeks later
03/05/07… Nasdaq100 +5.3% three weeks later
07/13/06… Nasdaq100 +2.2% three weeks later
05/12/06… Nasdaq100 -3.6% three weeks later
12/20/05… Nasdaq100 +4.9% three weeks later
06/27/05… Nasdaq100 +6.5% three weeks later
04/15/05… Nasdaq100 +3.4% three weeks later
01/21/05… Nasdaq100 +1.8% three weeks later
01/05/05… Nasdaq100 -3.6% three weeks later
08/06/04… Nasdaq100 +5.6% three weeks later
03/09/04… Nasdaq100 +0.5% three weeks later
08/06/03… Nasdaq100 +8.5% three weeks later
07/23/02… Nasdaq100 +1.2% three weeks later
05/06/02… Nasdaq100 +7.2% three weeks later
04/29/02… Nasdaq100 +3.7% three weeks later
09/18/01… Nasdaq100 +1.6% three weeks later
04/04/01… Nasdaq100 +28.6% three weeks later
02/09/01… Nasdaq100 -15.3% three weeks later
11/13/00… Nasdaq100 +0.6% three weeks later
10/11/00… Nasdaq100 +4.0% three weeks later
04/13/00… Nasdaq100 +3.8% three weeks later
05/25/99… Nasdaq100 +8.4% three weeks later
10/06/98… Nasdaq100 +14.2% three weeks later
08/31/98… Nasdaq100 +17.2% three weeks later
06/01/98… Nasdaq100 +8.4% three weeks later
12/12/97… Nasdaq100 +2.8% three weeks later
10/27/97… Nasdaq100 +7.2% three weeks later

Also noteworthy that the Put/Call Open Interest Ratio for Index Options has
been holding above the 1.30 level for over a week now. Pull up the long-term
chart of this indicator and note that readings consistently above 1.30 have
typically corresponded with bullish stock market performance. Institutional
investors are the primary participants in index options. When there’s a
healthy amount of put volume, it suggests hedging activity of fresh long
positions. It’s when that put volume is not present, as was the case over the
last few months as well as in the January-March period, that this indicator
suggests the market is vulnerable to a more sustained selloff. While there’s
no way of knowing whether this will be a brief spurt of put activity, as we
saw in early May, or the beginning of a more sustained period (as was the case
throughout 2007) remains to be seen. But for the time being, this is one
positive sign to counter some of the recently discussed negative intermediate-
term indications.

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

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