R-Squared Back Over 90%

Stocks settled with modest losses Tuesday. TICKscore closed at -6, Cumulative TICK at +1,365 – that keeps the 20-day moving average of the Cumulative TICK in a downtrend. The S&P500 settled down 0.6% at 1091, sending the 14-day R-Squared indicator back above 90% for the third time in the last three months. As noted yesterday, in only one case out of the last thirty was the S&P down 2% or more two weeks after such a high reading, suggesting SPX 1070 will function as a likely area of intermediate-term support. (Interesting to note that over the last twenty years,  there’s been only one time frame with a similar cluster of 90%+ readings  – the mid-to-late 90′s.)

Typically you’ll see at least a 0.5% selloff when Nasdaq breadth is 2:1 negative, which makes Tuesday’s session fairly unusual. Since 1990, there have only been nineteen cases in which Nasdaq breadth was 2:1 negative and the NDX settled down less than 0.5%. Each of these occurrences is listed in the table below, along with the performance of the Nasdaq over the next three sessions. Note that in only one case was the NDX down more than 1% three sessions later, while it was up over 1% twelve times…

Nasdaq Breadth 2:1 Negative & NDX Down <0.5%
10/20/09… NDX ??? three sessions later
07/08/09… NDX +2.6% three sessions later
04/06/09… NDX +2.1% three sessions later
02/20/09… NDX -1.0% three sessions later
10/23/08… NDX +4.7% three sessions later
10/08/08… NDX +7.4% three sessions later
05/23/08… NDX +3.1% three sessions later
02/28/08… NDX -2.8% three sessions later
01/05/07… NDX +1.7% three sessions later
06/13/06… NDX +3.0% three sessions later
02/07/06… NDX +0.7% three sessions later
11/15/05… NDX +2.2% three sessions later
10/11/05… NDX +0.3% three sessions later
08/26/05… NDX +1.5% three sessions later
08/05/05… NDX -1.0% three sessions later
03/09/04… NDX -0.4% three sessions later
10/09/02… NDX +11.6% three sessions later
11/09/00… NDX -0.6% three sessions later
09/21/93… NDX +3.4% three sessions later
10/05/92… NDX +1.5% three sessions later

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
10/20/09… NDX ??? two sessions later
08/28/09… NDX -2.9% two sessions later
05/27/09… NDX +2.4% 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

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. That said, recent performance has been somewhat erratic. The fact that the NDX nearly closed in positive territory today (and Nasdaq futures did close positive) makes me a bit more cautious short-term. As noted this afternoon on Twitter, when the NDX has closed in positive territory despite 2:1 negative breadth, a lower close is common within the next two days. Barring any significant changes, I would view further downside on Wednesday as a potential short-term buy.

Coming tomorrow: Building on the concept of Relative Volume discussed by Brett Steenbarger in this excellent post from January, we’ll be rolling out some Relative Cumulative TICK charts over at CumulativeTICK.com. The idea is to gauge how extreme (or average) the current TICK action is relative to recent history by comparing today’s cumulative TICK to the cumulative TICK at the same time in recent sessions.

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

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