Breakout or Fakeout?

The S&P500 followed the Nasdaq into new closing highs for the year Monday. On a short-term basis, it looks like that breakout could turn into a fakeout. After closing in 4:1 positive territory last Wednesday, NASDAQ breadth deteriorated to less than 2:1 positive on Thursday and nearly 3:2 negative on Friday even as the NDX closed higher both days. That’s usually a sign the rally is on shaky ground short-term, especially when it’s followed by an even higher close the next day. That’s what we saw Monday, and in today’s intraday update I posted the track record of the last thirty times we’ve seen this pattern. In 23 cases, or 77% of the time, the NDX closed lower the following session, significantly above the 48% at-any-time odds for a lower NDX close one session later in the same time frame.

In addition to the setups covered in Monday’s intraday update, there are other signs of limited upside potential short-term. New 20-day highs swamped 20-day lows by over a 10:1 margin, sending the 20-day High-Low Index above 90%. The table below lists each date over the last five years when the raw 20-day High-Low Index (new highs/(new highs+new lows)) closed over 90%, followed by the date when the Index closed back under 90% and the performance of the S&P500 in this time frame. Thirteen cases isn’t much to go on, but the typically flat-to-down performance of the S&P is consistent with the notion that the market is overextended on a short-term basis…

20-Day High-Low Index (raw daily number) >=90%
07/20/09 – ??/??/??… S&P500 ???
06/05/09 – 06/08/09… S&P500 -0.1%
06/01/09 – 06/02/09… S&P500 +0.2%
05/08/09 – 05/11/09…  S&P500 -2.2%
05/04/09 – 05/07/09…  S&P500 +0.0%
04/29/09 – 05/01/09…  S&P500 +0.4%
04/16/09 – 04/20/09…  S&P500 -3.8%
04/09/09 – 04/14/09…  S&P500 -1.8%
04/02/09 – 04/07/09…  S&P500 -2.3%
03/23/09 – 03/30/09…  S&P500 -4.3%
03/19/09 – 03/20/09…  S&P500 -2.0%
01/02/09 – 01/07/09…  S&P500 -2.7%
01/09/06 – 01/10/06…  S&P500 -0.0%
07/11/05 – 07/12/05…  S&P500 +0.2%

Despite the 1% gain for the S&P500, the Philadelphia Bank Index lagged considerably behind and actually finished slightly lower Monday. When the S&P closes up 1% or more and doubles the performance of the BKX, the S&P typically reverses course and closes at a lower level within the next couple of days. The last thirty occurrences are listed in the table below. Note that in 25 cases, or 83% of the time, the S&P closed below the setup day’s settlement within two sessions, significantly above the S&P’s 63% at-any-time odds…

SPX +1%, Doubles Performance of BKX
07/20/09… ???
06/01/09… Lower SPX close two sessions later
04/08/09… No lower close within two sessions
03/26/09… Lower SPX close one session later
03/04/09… Lower SPX close one session later
02/03/09… Lower SPX close one session later
12/10/08… Lower SPX close one session later
11/21/08… No lower close within two sessions
11/07/08… Lower SPX close one session later
10/30/08… No lower close within two sessions
10/23/08… Lower SPX close one session later
10/20/08… Lower SPX close one session later
10/13/08… Lower SPX close one session later
06/13/08… Lower SPX close two sessions later
03/24/08… Lower SPX close two sessions later
02/13/08… Lower SPX close one session later
01/14/08… Lower SPX close one session later
10/31/07… Lower SPX close one session later
08/24/07… Lower SPX close one session later
08/22/07… Lower SPX close one session later
03/06/07… Lower SPX close one session later
05/25/06… Lower SPX close two sessions later
04/21/05… Lower SPX close one session later
11/12/03… Lower SPX close one session later
05/09/03… No lower close within two sessions
04/10/02… Lower SPX close one session later
10/03/01… Lower SPX close one session later
08/24/01… Lower SPX close one session later
07/25/01… No lower close within two sessions
06/05/01… Lower SPX close one session later
05/21/01… Lower SPX close one session later

After midweek, when all of the short-term negative setups are off the board, the stage could be set for another upside run depending on how the market trades. But over the next 1-2 days, indications continue to point lower.

The 30-day sell setup triggered by the Nasdaq/NYSE Volume Ratio back on June 5th fell off the board today, but note that this indicator has triggered multiple sells since that time (see table below). I’m not going to put all of those long-term sells up on the board simultaneously, as I don’t want to give the appearance of overweighting one indicator. But as each one falls off the board, it will be replaced  by the latest signal. Bottom line is that this is a longer-term bearish indication that will remain on the board  through at least the end of September…

Nasdaq/NYSE Volume Ratio >1.75 Two Consecutive Sessions
07/15/09… NDX ??? thirty sessions later
07/10/09… NDX ??? thirty sessions later
07/02/09… NDX ??? thirty sessions later
06/24/09… NDX ??? thirty sessions later
06/05/09… NDX +3.4% thirty sessions later
11/04/08… NDX -11.1% thirty sessions later
10/06/08… NDX -18.4% thirty sessions later
09/05/08… NDX -25.8% thirty sessions later
08/27/08… NDX -32.9% thirty sessions later
08/11/08… NDX -15.1% thirty sessions later
05/15/08… NDX -8.7% thirty sessions later
05/05/08… NDX -0.2% thirty sessions later
10/24/07… NDX -2.8% thirty sessions later
05/22/01… NDX -14.3% thirty sessions later
05/03/01… NDX -9.4% thirty sessions later
04/20/01… NDX -4.9% thirty sessions later
02/23/01… NDX -29.6% thirty sessions later
01/18/01… NDX -29.6% thirty sessions later
01/11/01… NDX -16.9% thirty sessions later
12/18/00… NDX +2.5% thirty sessions later
12/11/00… NDX -12.7% thirty sessions later
11/24/00… NDX -18.3% thirty sessions later
11/13/00… NDX -13.3% thirty sessions later
11/08/00… NDX -27.3% thirty sessions later
11/03/00… NDX -23.4% thirty sessions later
09/25/00… NDX -9.2% thirty sessions later
09/05/00… NDX -20.4% thirty sessions later
08/25/00… NDX -15.6% thirty sessions later
07/14/00… NDX -2.7% thirty sessions later
04/14/00… NDX +6.4% thirty sessions later

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

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