Challenging Support

From Sunday’s column…

“seasonal tendencies indicate the next week and a half are likely to see the S&P trade sideways-to-down (see my September 14th column), suggesting moves above last week’s high around 1075 could represent selling opportunities. At the same time, SPX 1040 should represent fairly solid support given the 10+ Oscillator readings recorded this past week, indicating we’ll most likely want to buy moves below 1050.”

Conceptually, it was the right idea – selling above SPX 1075 – but I expected it to play out gradually, with an initial day or two breakout rally. Instead, we only saw an intraday move over 1075 yesterday that was quickly rejected. Now we’ll see about the idea of buying below 1050. Two supportive factors… the S&P is down 1.3% since Monday, and the two-week buy signal triggered by R-Squared on Monday has led to an S&P down more than 1.3% over the next two weeks only once out of the last thirty signals (see track record). Also, the S&P is down 1.9% since Tuesday, and Tuesday’s two-week buy signal based on the Standard & Poors Oscillator has led to an S&P down 1% or more two weeks later only twice out of the last thirty signals (see track record). Both studies suggest the current selloff is a buying opportunity, though neither rule out the potential for further weakness short-term.

Selling pressure following the FOMC announcement spilled over into Thursday’s session, leading to another 1% down day for the S&P500. TICKscore closed at -17, Cumulative TICK -45,000, the first day with net negative NYSE TICK action in fifteen sessions. The Nasdaq outperformed for the second day in a row as the market traded lower, a pattern that in recent years has led to a rally the following session (see intraday update). In addition, SPY triggered a one-day buy signal as well by opening higher for the third day in a row and closing below the open (see earlier update).

We’ll want to keep an eye out for another up open on Friday. When S&P futures repeatedly open higher, it signals bullish sentiment that usually carries through over the short-term. The table below lists the last thirty separate instances in which S&P futures opened higher four consecutive sessions…

S&P Futures Open Higher Four Consecutive Sessions
09/09/09… Higher S&P close one session later
06/01/09… Higher S&P close one session later
03/13/09… Higher S&P close two sessions later
12/26/08… Higher S&P close one session later
07/28/08… Higher S&P close one session later
07/21/08… Higher S&P close one session later
05/15/08… Higher S&P close one session later
04/28/08… Higher S&P close three sessions later
03/24/08… No higher S&P close within three days
02/14/08… Higher S&P close one session later
01/29/08… Higher S&P close two sessions later
12/12/07… No higher S&P close within three days
11/28/07… Higher S&P close one session later
07/17/07… Higher S&P close two sessions later
07/05/07… Higher S&P close one session later
06/18/07… Higher S&P close one session later
05/25/07… Higher S&P close one session later
05/03/07… Higher S&P close one session later
04/03/07… Higher S&P close one session later
03/26/07… No higher S&P close within three days
09/01/06… Higher S&P close one session later
07/21/06… Higher S&P close one session later
06/29/06… Higher S&P close two sessions later
05/26/06… Higher S&P close three sessions later
04/12/06… Higher S&P close three sessions later
04/03/06… Higher S&P close one session later
01/26/06… Higher S&P close one session later
12/21/05… Higher S&P close one session later
11/21/05… Higher S&P close one session later
10/06/05… Higher S&P close one session later

Note that in 27 out of 30 cases, or 90% of the time, the S&P closed above the setup day’s close within the next three sessions, well ahead of the 72% at-any-time odds for a higher S&P close within three days.

The CBOE equity put/call ratio spiked higher Thursday, closing at its highest level since July at .72, 25% above its 10-day moving average. More often than not, a spike in the equity put/call ratio is not a generally positive development. It suggest a spark of fear, and there’s usually some follow-through from the initial spark.  One effective way to play this trend is identify a spike and then sell into an immediate bounce. The table below highlights the last thirty instances in which the S&P500 closed higher immediately following a session in which the CBOE equity put/call ratio spiked more than 25% above its 10-day moving average…

Equity Put/Call Ratio 25% >10-day Avg, SPX Up Next Day
06/18/09… Lower S&P close two sessions later
01/13/09… Lower S&P close one session later
01/08/09… Lower S&P close one session later
11/07/08… Lower S&P close one session later
09/16/08… Lower S&P close one session later
09/10/08… Lower S&P close three sessions later
01/09/08… Lower S&P close two sessions later
12/05/07… no lower SPX close next 1-3 sessions
10/17/07… Lower S&P close one session later
07/25/07… Lower S&P close one session later
07/19/07… Lower S&P close one session later
03/29/07… Lower S&P close one session later
02/28/07… Lower S&P close one session later
10/04/06… Lower S&P close two sessions later
04/27/06… Lower S&P close two sessions later
12/28/05… Lower S&P close one session later
12/21/05… Lower S&P close three sessions later
11/16/05… no lower SPX close next 1-3 sessions
10/14/05… Lower S&P close two sessions later
08/29/05… Lower S&P close one session later
06/17/05… Lower S&P close one session later
06/01/05… Lower S&P close two sessions later
04/18/05… Lower S&P close two sessions later
04/07/05… Lower S&P close one session later
04/04/05… no lower SPX close next 1-3 sessions
03/17/05… Lower S&P close one session later
02/25/05… Lower S&P close one session later
02/10/05… no lower SPX close next 1-3 sessions
01/10/05… Lower S&P close one session later
08/09/04… Lower S&P close three sessions later

In 26 out of the last 30 occurrences, or 87% of the time, the S&P posted a subsequently lower close (below the setup day’s close) within the next three days, significantly above the 68% at-any-time odds for a lower S&P close within three days. This setup would go into effect only on a higher S&P close Friday (a higher open as well would create a mixed short-term outlook).

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

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