Uptick in Volatility and Narrow Range Bar Points to Short-term Weakness

A late-day rally sent the S&P up nearly 1% in Friday’s abbreviated session, triggering a number of short-term sell setups in the process. Volatility climbed despite NYSE breadth closing in 2:1 positive territory, a negative sign for Monday’s session. When volatility increases in the face of a lopsided positive breadth session, the market typically struggles to post more than modest gains the following session. Out of the last 30 occurrences, only two led to an S&P up more than 0.5% the next day…

Breadth 2:1 Positive, VXO Up
11/28/08… S&P ??? next day
10/16/08… S&P -0.6% next day
01/29/08… S&P -0.5% next day
08/08/07… S&P -3.0% next day
04/25/07… S&P -0.1% next day
10/16/06… S&P -0.4% next day
10/05/06… S&P -0.3% next day
06/30/06… S&P +0.8% next day (*)
01/04/06… S&P +0.0% next day
07/28/05… S&P -0.8% next day
06/16/05… S&P +0.5% next day
05/27/05… S&P -0.6% next day
12/28/04… S&P -0.0% next day
12/13/04… S&P +0.4% next day
11/12/04… S&P -0.0% next day
11/04/04… S&P +0.4% next day
03/05/04… S&P -0.8% next day
12/18/03… S&P -0.1% next day
10/27/03… S&P +1.5% next day (*)
10/13/03… S&P +0.4% next day
09/08/03… S&P -0.8% next day
09/02/03… S&P +0.4% next day
07/07/03… S&P +0.3% next day
06/04/03… S&P +0.4% next day
05/27/03… S&P +0.2% next day
05/06/03… S&P -0.5% next day
03/17/03… S&P +0.4% next day
11/27/02… S&P -0.3% next day
11/06/02… S&P -2.3% next day
03/06/02… S&P -0.5% next day
07/03/00… S&P -1.6% next day

Additionally, Friday’s lopsided breadth kept the NYSE McClellan Oscillator in overbought territory (>+150) for a second consecutive session. That triggers a short-term sell that remains in effect until the McClellan falls back to more average territory. The table below lists every instance since 1995 in which the McClellan closed over +150 two consecutive sessions, along with the S&P’s performance by the time the McClellan fell back under +100. Note that in 25 out of 29 cases, or 86% of the time, the S&P was at a lower level when the McClellan fell back under +100…

McClellan Over +150 Two Days Running
11/28/08… S&P500 ??? when McClellan <100
10/31/08… S&P500 -6.6% when McClellan <100
08/06/08… S&P500 -1.8% when McClellan <100
07/23/08… S&P500 -2.3% when McClellan <100
04/02/08… S&P500 -1.0% when McClellan <100
02/01/08… S&P500 -4.2% when McClellan <100
12/07/07… S&P500 -1.8% when McClellan <100
10/02/07… S&P500 -0.5% when McClellan <100
09/19/07… S&P500 -0.7% when McClellan <100
09/04/07… S&P500 -2.4% when McClellan <100
03/22/07… S&P500 -0.4% when McClellan <100
08/17/06… S&P500 +0.0% when McClellan <100
07/03/06… S&P500 -1.7% when McClellan <100
01/09/06… S&P500 -0.3% when McClellan <100
11/25/05… S&P500 -0.9% when McClellan <100
06/02/05… S&P500 -0.8% when McClellan <100
05/19/05… S&P500 -0.1% when McClellan <100
05/25/04… S&P500 +1.6% when McClellan <100(*)
09/03/03… S&P500 -0.3% when McClellan <100
04/23/03… S&P500 -2.2% when McClellan <100
11/04/02… S&P500 -1.5% when McClellan <100
08/16/02… S&P500 -1.2% when McClellan <100
12/29/00… S&P500 -1.9% when McClellan <100
01/10/00… S&P500 -1.3% when McClellan <100
11/01/99… S&P500 +1.4% when McClellan <100(*)
04/22/99… S&P500 -1.7% when McClellan <100
10/19/98… S&P500 +6.2% when McClellan <100(*)
09/29/98… S&P500 -7.5% when McClellan <100
05/05/97… S&P500 -0.1% when McClellan <100
08/05/96… S&P500 -0.0% when McClellan <100

The S&P500 held to a tight 15-point range Friday, the smallest range day since early September. It’s generally a short-term negative sign when an NR10 bar appears after a short-term rally. In the table below I’ve listed each of the last thirty instances in which the S&P posted its narrowest range day of the past ten sessions (NR10) immediately following three consecutive higher closes (as was the case Friday). Note that in 27 out of 30 cases, or 90% of the time, the S&P posted a subsequently lower close within the next three days…

SPX NR10 Bar Following Three Up Days
11/28/08… ???
05/30/08… Lower SPX close one session later
04/28/08… Lower SPX close one session later
04/08/08… Lower SPX close one session later
03/26/08… Lower SPX close one session later
12/26/07… Lower SPX close one session later
12/03/07… Lower SPX close one session later
09/14/07… Lower SPX close one session later
07/09/07… Lower SPX close one session later
06/18/07… Lower SPX close two sessions later
05/07/07… Lower SPX close one session later
04/09/07… Lower SPX close two sessions later
03/22/07… Lower SPX close three sessions later
02/02/07… Lower SPX close one session later
01/16/07… Lower SPX close one session later
10/24/06… Lower SPX close three sessions later
09/28/06… Lower SPX close one session later
08/21/06… Lower SPX close two sessions later
03/17/06… Lower SPX close one session later
02/17/06… Lower SPX close one session later
11/25/05… Lower SPX close one session later
09/30/05… Lower SPX close one session later
07/13/05… Lower SPX close three sessions later
05/19/05… Lower SPX close one session later
12/23/04… Lower SPX close one session later
11/08/04… Lower SPX close one session later
11/01/04… No lower close within three sessions
09/14/04… Lower SPX close one session later
07/30/04… Lower SPX close two sessions later
05/28/04… Lower SPX close three sessions later
05/26/04… No lower close within three sessions

Along with the fact that the session before Thanksgiving represented a ‘recovery day’ (down in the morning/up in the afternoon), traditionally not a positive sign for the next couple of sessions, and the short-term outlook has not improved.

Dow Down 100+ Intraday, Closes Up 100+
11/26/08… Dow ??? two days later
11/18/08… Dow -872 two days later
11/13/08… Dow -561 two days later
10/23/08… Dow -515 two days later
10/16/08… Dow +286 two days later
09/26/08… Dow -292 two days later
09/18/08… Dow -4 two days later
09/16/08… Dow -39 two days later
09/11/08… Dow -516 two days later
01/31/08… Dow -15 two days later
01/23/08… Dow -63 two days later
01/10/08… Dow -75 two days later
08/14/02… Dow +35 two days later
07/24/02… Dow +73 two days later
05/01/02… Dow -53 two days later
10/25/01… Dow -193 two days later
08/10/01… Dow -4 two days later
05/04/01… Dow -68 two days later
03/09/00… Dow -64 two days later
08/05/99… Dow -86 two days later
10/02/98… Dow -42 two days later
09/01/98… Dow -145 two days later
10/28/97… Dow -117 two days later

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

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