How Wednesday’s Session Will Affect the Intermediate-term Outlook

Three weeks ago, on May 4th, the S&P was trading at virtually the same level as it is now and new 20-day highs outnumbered new 20-day lows by over 2,500. One week ago, with the S&P again at a similar level, that difference had narrowed to 649. Today, with the S&P once again back in the 910 area, the difference between new 20-day highs and lows has narrowed to 542. We’re still seeing a plurality of new highs over new lows, but the rally is not nearly as broad-based as it was three weeks ago.

In recent times, whenever 20-day highs have initially exceeded 1,000, the market?s upside potential has been limited over the next couple of sessions. The last thirty instances in which 20-day Highs initially exceeded 1,000 are listed in the table below, along with the S&P?s performance over the next two days. Note that in 22 cases, or 73% of the time, the S&P was trading lower two sessions later, significantly above the 53% at-any-time odds for a lower S&P two days later (in the same time frame). Particularly noteworthy is that in only four cases out of thirty was the S&P up 1%+ two sessions later, while it was down 1%+ a total of 21 times?

New 20-day Highs Exceed 1,000
05/26/09? S&P500 ??? two sessions later
05/19/09? S&P500 -2.2% two sessions later
04/29/09? S&P500 +0.4% two sessions later
04/24/09? S&P500 -1.3% two sessions later
04/22/09? S&P500 +2.7% two sessions later
04/16/09? S&P500 -3.8% two sessions later
04/09/09? S&P500 -1.8% two sessions later
04/02/09? S&P500 +0.1% two sessions later
03/23/09? S&P500 -1.1% two sessions later
03/18/09? S&P500 -3.3% two sessions later
02/06/09? S&P500 -4.8% two sessions later
01/09/09? S&P500 -2.1% two sessions later
12/31/08? S&P500 +2.7% two sessions later
12/16/08? S&P500 -3.1% two sessions later
12/08/08? S&P500 -1.2% two sessions later
11/04/08? S&P500 -10.0% two sessions later
09/19/08? S&P500 -5.3% two sessions later
09/08/08? S&P500 -2.8% two sessions later
09/02/08? S&P500 -3.2% two sessions later
08/15/08? S&P500 -2.4% two sessions later
08/08/08? S&P500 -0.5% two sessions later
08/05/08? S&P500 -1.5% two sessions later
07/30/08? S&P500 -1.9% two sessions later
07/23/08? S&P500 -1.9% two sessions later
06/05/08? S&P500 -3.0% two sessions later
05/21/08? S&P500 -1.1% two sessions later
05/12/08? S&P500 +0.4% two sessions later
05/06/08? S&P500 -1.5% two sessions later
04/30/08? S&P500 +2.0% two sessions later
04/24/08? S&P500 +0.5% two sessions later
04/16/08? S&P500 +1.9% two sessions later

But the real key from an intermediate-term perspective is whether the S&P closes higher Wednesday. If it does, it would represent immediate follow-through after a potentially significant buying session. Note the large range for the S&P on Tuesday, with over 30 points separating the intraday high and low. That’s the largest range in over a month, and breadth was lopsided positive by over a 4:1 margin. Looking back at previous sessions in which the S&P posted a ‘LR20 session’ (largest of last twenty sessions) and breadth finished at least 3:1 positive, it’s generally a positive sign looking out the next couple of weeks. But it’s dramatically more reliable when the S&P follows through immediately with another higher close the following day. When this occurs, there’s little doubt about who’s in control of the tape, and invariably the S&P is trading higher two weeks later. The last thirty occurrences are listed in the table below…

S&P Closes Higher after LR20 Day w/ 3:1+ Positive Breadth
08/11/08… S&P500 -3.0% two weeks later
07/17/08… S&P500 +0.6% two weeks later
09/19/07… S&P500 +0.7% two weeks later
11/07/06… S&P500 +1.4% two weeks later
10/05/06… S&P500 +1.0% two weeks later
09/13/06… S&P500 +1.4% two weeks later
04/19/06… S&P500 -0.2% two weeks later
01/04/06… S&P500 +0.9% two weeks later
11/05/04… S&P500 +0.4% two weeks later
05/26/04… S&P500 +1.9% two weeks later
10/02/03… S&P500 +2.9% two weeks later
03/17/00… S&P500 +2.3% two weeks later
10/16/98… S&P500 +4.0% two weeks later
04/30/97… S&P500 +4.3% two weeks later
02/06/95… S&P500 +0.3% two weeks later
12/24/91… S&P500 +4.6% two weeks later
01/18/91… S&P500 +3.3% two weeks later
05/14/90… S&P500 +1.7% two weeks later
05/15/89… S&P500 +0.9% two weeks later
01/05/89… S&P500 +2.5% two weeks later
09/06/88… S&P500 +1.6% two weeks later
06/01/88… S&P500 +2.9% two weeks later
01/06/87… S&P500 +6.4% two weeks later
01/05/87… S&P500 +6.8% two weeks later
03/12/86… S&P500 +2.1% two weeks later
12/16/85… S&P500 -0.4% two weeks later
05/13/85… S&P500 +1.8% two weeks later
01/22/85… S&P500 +2.9% two weeks later
08/06/84… S&P500 +1.4% two weeks later
08/03/84… S&P500 +1.1% two weeks later

Note that in 27 out of 30 cases, or 90% of the time, the S&P was trading at an even higher level two weeks later. That’s significantly above the 58% at-any-time odds for a higher S&P500 two weeks later. When the market has followed through with another higher close immediately after a bullish large range session, it’s been a very reliable indication of further upside over the next ten trading days.

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

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