Staying Cautious About Short-term Bullish Setups Given Recent Performance

In ordinary times, I’d probably discuss the fact that the Nasdaq100 managed to post a higher high and higher low despite the 2:1 negative breadth on the NASDAQ exchange. But these are no ordinary times, and while the setup has performed well over the last thirty signals, I won’t be adding it to the board.

NDX Higher High & Higher Low Despite 3:2 Neg Breadth
12/04/08… NDX ??? three sessions later
10/14/08… NDX -3.8% two sessions later
08/07/08… NDX +3.3% two sessions later
06/17/08… NDX +0.5% two sessions later
03/19/08… NDX +5.8% two sessions later
02/28/08… NDX -3.4% two sessions later
02/21/08… NDX +1.1% two sessions later
10/30/07… NDX -0.5% two sessions later
09/24/07… NDX +1.5% two sessions later
07/16/07… NDX +0.5% two sessions later
05/17/07… NDX +1.4% two sessions later
05/14/07… NDX +0.2% two sessions later
11/09/06… NDX +1.6% two sessions later
10/20/06… NDX +0.3% two sessions later
08/09/06… NDX +0.1% two sessions later
07/27/06… NDX +2.1% two sessions later
04/03/06… NDX +1.5% two sessions later
10/20/05… NDX +2.3% two sessions later
07/21/05… NDX -0.5% two sessions later
05/12/05… NDX +1.8% two sessions later
04/08/05… NDX +0.2% two sessions later
01/13/05… NDX +1.8% two sessions later
10/19/04… NDX +2.2% two sessions later
10/13/04… NDX -0.2% two sessions later
10/07/04… NDX -1.2% two sessions later
09/08/04… NDX +2.6% two sessions later
05/07/04… NDX +1.1% two sessions later
03/02/04… NDX +0.6% two sessions later
02/12/04… NDX +0.4% two sessions later
01/22/04… NDX +1.5% two sessions later
08/22/03… NDX +0.4% two sessions later

It’s not just that it’s batted 4 for 7 (57%) recently, well below its 80% historical average. Similar combinations that have led to short-term upside have also been failing recently. For instance, the S&P posted a higher high and higher low Thursday despite breadth closing 2:1 negative. Prior to the last couple of months this was a rare occurrence, only seen ten times in the last decade. Most of those occurrences led to a higher S&P three sessions later. But not recently, with all three recent signals failing in spectacular fashion. It’s therefore difficult to put a positive spin on this latest signal…

SPX Higher High & Higher Low Despite 2:1 Neg Breadth
12/04/08… S&P500 ??? three sessions later
11/14/08… S&P500 -7.6% three sessions later
11/10/08… S&P500 -0.9% three sessions later
10/21/08… S&P500 -8.2% three sessions later
07/02/08… S&P500 +1.0% three sessions later
03/19/08… S&P500 +4.2% three sessions later
02/21/08… S&P500 +2.9% three sessions later
07/16/07… S&P500 +0.2% three sessions later
07/20/06… S&P500 +1.6% three sessions later
10/26/05… S&P500 +1.3% three sessions later
10/20/05… S&P500 +1.6% three sessions later
10/02/02… S&P500 -5.2% three sessions later
08/06/99… S&P500 +0.1% three sessions later
09/09/98… S&P500 +2.3% three sessions later

Thursday’s solid selloff came on decreasing volume, but once again I’d be cautious about reading too much into the light volume. This wasn’t always the case – see my May 7th column from earlier this year in which I discussed the bullish implications of a solid down day on below-average volume. This setup historically batted about 70% in terms of calling for a higher S&P one week later. But take a look at the performance over the past three months, with only 1 out of 8 signals leading to a higher market one week later…

S&P500 -1.5%, Breadth 2:1 Neg, Volume Below 20-day Avg
12/04/08… S&P ??? one week later
11/17/08… S&P +0.1% one week later
11/11/08… S&P -4.4% one week later
11/05/08… S&P -10.6% one week later
10/24/08… S&P +10.5% one week later
10/21/08… S&P -1.5% one week later
10/15/08… S&P -1.2% one week later
10/02/08… S&P -18.3% one week later
09/22/08… S&P -8.3% one week later

From Thursday’s intraday updates… “the S&P is up over 5% in the last two weeks, yet the New High-Low Index is still running at very low levels (it closed just over 10% on Wednesday). Usually when the S&P is up 5%+ in two weeks, the High-Low Index is up in the 80%+ range. When it’s not, it’s been a fairly reliable two-week sell signal. Last instance was on November 4th, and that setup will be triggered again at today’s close assuming the SPX holds above 847.” The S&P didn’t end up holding that level, but it nonetheless reflects the market’s tenuous situation. As I noted back on November 4th, “prior to the last year, the [new high-low index] routinely moved into the 80% area during market rallies. This reflects the fact that a large majority of issues were hitting new highs vs. new lows, a generally bullish sign. It’s not bullish when a big move in the S&P is not accompanied by an expansion of new 52-week highs (relative to new lows). That is the case currently.” while it just missed being triggered Thursday, this bearish intermediate-term setup could still come into play on Friday on a close above SPX 790 (which would still be 5%+ above the two-week ago close).

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

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