ADX Triggers a Long-term Buy Signal

The potential sell signal outlined in Wednesday’s intraday update was nullified prior to the final two hours of the session when 20-day highs exceeded Monday’s level (see twitter update). 20-day highs ended just above 1,800,  still below mid-September levels but much improved from recent sessions. Over 400 issues hit new 52-week highs Wednesday for the first time in over two years. As noted last week, readings this high tend to lead to further upside over the next thirty sessions.

Despite the upside gap and strong gain, institutional participation was light Wednesday, as it’s been for the past four sessions. NYSE TICK action was neutral for much of the session, only picking up late in the day. TICKscore closed  at +4, Cumulative TICK settled at +21,700. Over 850 individual issues across the NYSE and NASDAQ closed over their upper bollinger band Wednesday, a sign of strong upside momentum. This has typically translated into at least one subsequently higher S&P close within the next week. Below I’ve listed every instance over the past four years in which over 800 issues closed over their upper band…

800+ Stocks Close Over Upper Bollinger Band
10/14/09… ???
09/16/09… Higher S&P close four sessions later
07/23/09… Higher S&P close one session later
07/15/09… Higher S&P close one session later
06/01/09… Higher S&P close one session later
05/08/09… No higher S&P close within five days
05/04/09… Higher S&P close two sessions later
04/09/09… Higher S&P close one session later
03/26/09… Higher S&P close five sessions later
03/23/09… Higher S&P close three sessions later
01/02/09… Higher S&P close two sessions later
04/01/08… Higher S&P close three sessions later
12/06/07… Higher S&P close two sessions later
09/18/07… Higher S&P close one session later
04/16/07… Higher S&P close one session later
10/12/06… Higher S&P close one session later

Note that out of fifteen occurrences, all but one led to upside follow-through either immediately or after a shallow pullback.

Eight consecutive higher closes by the Nasdaq100 is an indication of an unusually persistent uptrend that normally leads to further gains over the next week. In the table below I’ve listed every instance since 1986 in which the Nasdaq100 index (NDX) closed higher eight sessions in a row, followed by the performance of the NDX over the next five trading days. Despite the overbought conditions, sixteen out of eighteen signals led to a higher NDX close one week later…

Nasdaq100 Up Eight Consecutive Sessions
10/14/09… Nasdaq ??? one week later
07/17/09… Nasdaq +4.1% one week later
05/24/05… Nasdaq +1.2% one week later
06/01/04… Nasdaq +1.9% one week later
12/27/99… Nasdaq +5.3% one week later
11/08/96… Nasdaq +0.1% one week later
09/20/96… Nasdaq +0.2% one week later
07/10/95… Nasdaq +4.1% one week later
08/17/94… Nasdaq +0.4% one week later
01/02/92… Nasdaq +5.1% one week later
05/31/91… Nasdaq -3.0% one week later
02/01/91… Nasdaq +4.3% one week later
12/03/90… Nasdaq +2.5% one week later
05/09/90… Nasdaq +4.5% one week later
10/09/89… Nasdaq -5.0% one week later
09/14/88… Nasdaq +0.5% one week later
01/13/87… Nasdaq +4.3% one week later
05/29/86… Nasdaq +0.5% one week later
04/17/86… Nasdaq +0.5% one week later
02/11/86… Nasdaq +1.0% one week later

From a longer-term perspective, the 7-day ADX for the S&P500 triggered a bullish signal Wednesday. The Positive Directional Indicator, or +DI, is a component of Welles Wilder’s ADX that  measures the force of up moves. On Wednesday this measurement closed at a very high +50, reflecting an unusually forceful up move. Note from this long-term chart that readings of +50 or higher are rare – when they have occurred, it’s been a bullish sign for stocks over the next couple of months. The table below lists each of the last thirty separate instances in which the 7-day +DI for the S&P500 closed at +50 or higher (for the first time in at least ten days), along with the performance of the S&P over the next forty trading days…

7-Day +DI for SPX >=50
10/14/09… S&P500 ??? two months later
07/23/09… S&P500 +9.4% two months later
11/23/05… S&P500 +0.1% two months later
11/05/04… S&P500 +1.9% two months later
12/29/03… S&P500 +3.2% two months later
06/06/03… S&P500 -0.5% two months later
10/29/99… S&P500 +7.0% two months later
11/23/98… S&P500 +3.1% two months later
06/13/97… S&P500 +4.9% two months later
04/30/97… S&P500 +10.3% two months later
02/13/97… S&P500 -8.4% two months later
11/25/96… S&P500 +2.7% two months later
11/07/96… S&P500 +3.5% two months later
09/16/96… S&P500 +7.0% two months later
01/31/96… S&P500 +2.0% two months later
12/05/95… S&P500 +3.4% two months later
09/11/95… S&P500 +2.5% two months later
05/04/95… S&P500 +4.7% two months later
03/27/95… S&P500 +5.0% two months later
02/06/95… S&P500 +5.0% two months later
01/16/95… S&P500 +5.0% two months later
10/15/93… S&P500 -0.8% two months later
02/03/93… S&P500 +0.7% two months later
12/23/91… S&P500 +4.3% two months later
01/18/91… S&P500 +12.0% two months later
12/06/90… S&P500 +5.9% two months later
05/11/90… S&P500 +1.3% two months later
01/02/90… S&P500 -7.7% two months later
10/04/89… S&P500 -3.1% two months later
05/12/89… S&P500 +4.8% two months later
04/18/89… S&P500 +5.8% two months later

Note that in 25 out of the last 30 occurrences, or 83% of the time, the S&P was higher two months later, significantly better than the 62% at-any-time odds for a higher S&P two months later in the same time frame.

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

 Print This Post