Questioning the Intermediate-term Outlook

The S&P500 failed to follow through from Tuesday’s large range bar, calling into question the sustainability of the intermediate-term uptrend. New 20-day highs remained over 1,000 for the second day in a row Wednesday, but note that the spread between new 20-day highs and lows continues to trace out a pattern of lower highs. VXO closed up 7% but still remains below its 20-day moving average, the 55th consecutive session that the volatility index has closed under its 20-day average. The persistently low volatility, along with the elevated Nasdaq/NYSE Volume Ratio and recent top in the Cumulative TICK 20-day average suggest rallies over the short-term will most likely continue to fail given the dearth of real buyers.

On a short-term basis, we should keep in mind the positive seasonal setup recently discussed in Monday’s column. Recall that the three days following the first day back from Memorial Day tend to be positive for stocks. In only two years out of the last thirty did the S&P lose more than 1% in this three-day time frame – 1980 and 1982, when the S&P fell 1.3% and 1.4% respectively. With two days left in the current time frame, and the S&P already down 1.9% since Tuesday’s close, this seasonal pattern suggests we’ll see the S&P recoup some of today’s losses over the next two sessions.

The fact that the NDX posted a higher high and higher low despite nearly 2:1 negative breadth is also a positive sign for the next couple of days. The last thirty times the NDX has traded in a similar manner are listed in the table below, along with the performance of the Nasdaq100 over the next two sessions…

NDX Higher High & Higher Low Despite 3:2 Neg Breadth
05/27/09? NDX ??? two sessions later
05/15/09? NDX +3.2% two sessions later
04/27/09? NDX +0.9% two sessions later
02/25/09? NDX -3.8% two sessions later
02/04/09? NDX +5.1% two sessions later
01/22/09? NDX +1.4% two sessions later
12/09/08? NDX -2.6% two sessions later
12/04/08? NDX +8.6% two 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

Note that in 23 out of 30 cases, or 77% of the time, the NDX was trading higher two sessions later, significantly above the 52% at-any-time odds for a higher NDX two days later.

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

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