Tendencies Following Wide Range Days

Stocks closed sharply lower Tuesday amid active institutional selling. TICKscore closed at -51, Cumulative TICK -75,000, both the lowest readings seen in over two months. Volume was heavy, particularly for trading vehicles like SPY where over 300 million shares traded hands.  NYSE consolidated  volume came in at 7.2 billion, not even a one-month high.

Historically, a 1%+ selloff immediately following an unfilled downside gap (as occurred Monday) has usually led to a bit more follow-through over the short-term, although it should be noted this is a relatively rare phenomenon. Since inception of the S&P futures contract, there have only been 24 occurrences of a 1%+ drop the day after a downside gap. In the last 21 cases, the S&Ps proceeded to post a subsequently lower close, either immediately or after a short-term bounce…

S&P Futures -1% following Unfilled Downside Gap
09/01/09… ???
06/16/09… Lower S&P close one session later
03/03/09… Lower S&P close two sessions later
10/07/08… Lower S&P close one session later
05/21/08… Lower S&P close two sessions later
11/18/03… Lower S&P close two sessions later
01/21/03… Lower S&P close one session later
09/24/02… Lower S&P close four sessions later
07/22/02… Lower S&P close one session later
03/12/01… Lower S&P close two sessions later
02/20/01… Lower S&P close one session later
09/15/99… Lower S&P close four sessions later
07/30/99… Lower S&P close two sessions later
05/06/98… Lower S&P close one session later
10/24/97… Lower S&P close one session later
12/12/96… Lower S&P close two sessions later
05/09/94… Lower S&P close two sessions later
03/25/94… Lower S&P close two sessions later
10/10/90… Lower S&P close one session later
08/22/90… Lower S&P close one session later
03/25/88… Lower S&P close five sessions later
11/30/87… Lower S&P close one session later
09/12/86… No lower S&P close within five sessions
07/15/86… No lower S&P close within five sessions
01/24/83… No lower S&P close within five sessions

While we still have some longer-term setups on the board pointing towards higher prices heading into the end of September, Tuesday’s selloff most likely generated some downside momentum that will be difficult to shake off on the first try. Particularly noteworthy was the wide range day for S&P futures – over 32 points separated the day’s intraday high and low, the largest one-day range since March. Unusually wide range days on the downside typically lead to further weakness. Not necessarily immediately, but there’s a consistent tendency for lower prices looking out 4-5 trading days. The table below lists the last thirty instances in which S&P futures posted the largest range in two months (forty trading days) and NYSE breadth closed at least 2:1 negative…

WR40 Day w/ 2:1 Negative Breadth
09/01/09… ???
02/10/09… Lower S&P close four sessions later
10/09/08… Lower S&P close four sessions later
09/29/08… Lower S&P close four sessions later
09/09/08… Lower S&P close four sessions later
06/06/08… Lower S&P close four sessions later
12/11/07… Lower S&P close four sessions later
11/26/07… No lower close 4-5 sessions later
07/26/07… Lower S&P close four sessions later
06/07/07… No lower close 4-5 sessions later
05/24/07… No lower close 4-5 sessions later
02/27/07… Lower S&P close four sessions later
11/27/06… No lower close 4-5 sessions later
05/17/06… Lower S&P close four sessions later
05/11/06… Lower S&P close four sessions later
04/07/06… Lower S&P close four sessions later
10/06/05… Lower S&P close four sessions later
03/22/05… Lower S&P close four sessions later
01/04/05… Lower S&P close five sessions later
01/03/05… Lower S&P close four sessions later
10/13/04… Lower S&P close four sessions later
07/21/04… No lower close 4-5 sessions later
04/20/04… No lower close 4-5 sessions later
04/13/04… Lower S&P close five sessions later
01/28/04… Lower S&P close five sessions later
08/05/03… No lower close 4-5 sessions later
07/15/02… Lower S&P close four sessions later
07/10/02… Lower S&P close four sessions later
06/03/02… Lower S&P close four sessions later
01/29/02… Lower S&P close four sessions later
09/19/01… Lower S&P close five sessions later

Note that in 23 out of the last 30 occurrences, or 77% of the time, the S&P closed at a subsequently lower level 4-5 trading days later. By comparison, the random odds of a lower S&P close 4-5 trading days later in the same period of time is only 54%. This suggests the S&P is likely to be trading below current levels on the first day or two after the Labor Day break.

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

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