Large % Gain Triggers Intermediate-term Signal

Stock indices scored impressive gains Monday in light trading. S&P futures posted an unfilled upside gap and closed up over 2%, with a correspondingly large jump in new 52-week highs – 220 on the NYSE, 99 on the NASDAQ. TICKscore closed at +11, Cumulative TICK +81,800.  NYSE volume was up slightly, but volume in the SPY fell to a fresh three-week low, triggering a 1-2 day sell setup (see intraday update). I’d also note that the S&P500 is technically overbought, with the SPX 2-day RSI settling above 98. In recent years, this has been a good indication that a short-term top is nearby. We’ve seen the SPX 2-day RSI cross the 98 threshold a total of 27 times since 1999, 22 of which led to a lower S&P close by the time the 2-day RSI closed back under 98…

S&P500 2-Day RSI Closes Over 98
11/09/09… S&P500 ??? when RSI <98
09/16/09… S&P500 -0.3% when RSI <98   (one day)
07/23/09… S&P500 +0.3% when RSI <98   (three days)
07/20/09… S&P500 +0.3% when RSI <98   (two days)
07/16/09… S&P500 -0.0% when RSI <98   (one day)
05/04/09… S&P500 -0.4% when RSI <98 (one day)
01/02/09… S&P500 -0.5% when RSI <98 (one day)
04/10/07… S&P500 -0.7% when RSI <98 (one day)
10/26/06… S&P500 -0.4% when RSI <98 (two days)
03/17/06… S&P500 -0.2% when RSI <98 (one day)
11/22/05… S&P500 -0.3% when RSI <98 (three days)
09/30/05… S&P500 -0.2% when RSI <98 (one day)
07/15/05… S&P500 -0.6% when RSI <98 (one day)
06/17/05… S&P500 -0.1% when RSI <98 (one day)
11/03/04… S&P500 +1.9% when RSI <98 (three days)
05/25/04… S&P500 +0.7% when RSI <98 (three days)
04/05/04… S&P500 -0.2% when RSI <98 (one day)
09/02/03… S&P500 -0.1% when RSI <98 (three days)
06/04/03… S&P500 +0.2% when RSI <98 (two days)
03/19/03… S&P500 -1.0% when RSI <98 (three days)
05/21/01… S&P500 -0.3% when RSI <98 (one day)
04/19/01… S&P500 -0.9% when RSI <98 (one day)
08/08/00… S&P500 -0.7% when RSI <98 (one day)
07/14/00… S&P500 -1.1% when RSI <98 (two days)
12/31/99… S&P500 -1.0% when RSI <98 (one day)
12/23/99… S&P500 -0.1% when RSI <98 (one day)
07/02/99… S&P500 -0.2% when RSI <98 (one day)
04/12/99… S&P500 -0.7% when RSI <98 (one day)

It should be noted that prior to 1999, this signal wasn’t nearly as effective.

Monday’s big 2%+ up day triggered a bullish intermediate-term signal. A 2%+ up day for the S&P after multiple days of higher highs and higher lows may not sound like a great time to buy. Prices are high, so it’s natural to wait for a pullback. The problem is that the pullback is often quicker and shallower than expected before the market takes off again. Here’s a look at all cases since 1965 in which the S&P gained 2%+ after three days of higher highs and higher lows. While there have only been eleven cases, it’s noteworthy that the market moved higher over the next two weeks in all but one instance…

S&P500 2% Up Day After Three Days of Higher Highs & Lows
11/09/09… S&P500 ??? two weeks later
07/23/09… S&P500 +2.1% two weeks later
03/17/09… S&P500 +2.5% two weeks later
12/30/91… S&P500 +1.3% two weeks later
05/11/90… S&P500 +0.7% two weeks later
12/18/87… S&P500 +3.8% two weeks later
03/11/86… S&P500 +1.3% two weeks later
10/11/82… S&P500 -0.9%  two weeks later
08/02/78… S&P500 +1.7% two weeks later
08/16/71… S&P500 +0.8% two weeks later
08/24/70… S&P500 +2.5% two weeks later
04/01/68… S&P500 +4.7% two weeks later

To increase the sample size a bit, I also looked at the results following three days of higher highs or higher lows (but not necessarily both). Interestingly, the market performed much better when the 2% up day followed three days of ‘higher lows’. It seems that the absence of sellers, as reflected by the three higher lows, is more significant than the presence of buyers (which could have interesting implications for other studies). There have been 27 occurrences of this pattern since 1965, all of which are listed below along with the S&P’s performance over the next two weeks…

S&P500 2% Up Day After Three Days of Higher Lows
11/09/09… S&P500 ??? two weeks later
07/23/09… S&P500 +2.1% two weeks later
03/17/09… S&P500 +2.5% two weeks later
03/12/09… S&P500 +10.9% two weeks later
12/05/08… S&P500 +1.4% two weeks later
11/04/08… S&P500 -14.6% two weeks later (*)
10/17/02… S&P500 +0.8% two weeks later
03/01/02… S&P500 +3.0% two weeks later
04/10/01… S&P500 +5.2% two weeks later
12/23/98… S&P500 +3.8% two weeks later
11/23/98… S&P500 -0.6% two weeks later
10/15/98… S&P500 +3.7% two weeks later
02/02/98… S&P500 +2.2% two weeks later
05/05/97… S&P500 +0.4% two weeks later
12/30/91… S&P500 +1.3% two weeks later
02/11/91… S&P500 -1.6% two weeks later
05/11/90… S&P500 +0.7% two weeks later
01/04/88… S&P500 -1.6% two weeks later
12/18/87… S&P500 +3.8% two weeks later
04/21/87… S&P500 +0.8% two weeks later
03/11/86… S&P500 +1.3% two weeks later
10/11/82… S&P500 -0.9% two weeks later
10/07/82… S&P500 +8.0% two weeks later
10/06/82… S&P500 +10.5% two weeks later
08/02/78… S&P500 +1.7% two weeks later
08/16/71… S&P500 +0.8% two weeks later
08/24/70… S&P500 +2.5% two weeks later
04/01/68… S&P500 +4.7% two weeks later

When a big rally has come after a series of higher lows, it has not been a good time to turn bearish. In 22 out of 27 occurrences, or 81% of the time, the S&P was higher two weeks later, averaging a gain of 3.3%. That’s significantly above the 56% at-any-time odds for a higher S&P two weeks later. Equally noteworthy is that the S&P was down more than 2% two weeks later only once, while it was up more than 2% two weeks later thirteen times. This points to SPX 1070 as a likely area of intermediate-term support. While indications suggest a close below today’s settlement in the next 1-2 sessions, this momentum study (along with current longer-term bullish setups still on the board) is a strong indication that higher prices are likely heading into Thanksgiving week.

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

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