Bullish Signs from Pre-Christmas Trade

Quick note on Thursday’s half-session… (updates will be limited this week, regular updates will resume January 4th)… For the second day in a row, S&P futures opened above the previous session’s high, usually a sign of strength for the next day (Monday in this case). The last thirty times the front-month S&Ps opened above the previous day’s high on two consecutive sessions are listed in the table below…

S&P Futures Open >Previous Session’s High Two Days
12/24/09…  S&P500 ??? next day
09/09/09…  S&P500 +0.9% next day
09/08/09…  S&P500 +0.7% next day
08/24/09…  S&P500 +0.2% next day
07/21/09…  S&P500 -0.4% next day
07/15/09…  S&P500 +0.9% next day
06/01/09…  S&P500 +0.4% next day
05/07/09…  S&P500 +2.4% next day
03/16/09…  S&P500 +3.2% next day
12/31/08…  S&P500 +3.2% next day
11/25/08…  S&P500 +3.5% next day
10/14/08…  S&P500 -9.0% next day
05/14/08…  S&P500 +1.1% next day
04/16/08…  S&P500 +0.1% next day
04/02/08…  S&P500 +0.1% next day
03/19/08…  S&P500 +2.4% next day
01/25/08…  S&P500 +1.8% next day
12/24/07…  S&P500 +0.1% next day
10/29/07…  S&P500 -0.7% next day
09/27/07…  S&P500 -0.3% next day
09/19/07…  S&P500 -0.7% next day
08/23/07…  S&P500 +1.2% next day
06/01/07…  S&P500 +0.2% next day
04/17/07…  S&P500 +0.1% next day
04/16/07…  S&P500 +0.2% next day
03/09/07…  S&P500 +0.3% next day
08/16/06…  S&P500 +0.2% next day
08/15/06…  S&P500 +0.8% next day
06/30/06…  S&P500 +0.8% next day
05/26/06… S&P500 -1.6% next day
12/27/05… S&P500 +0.1% next day

In 24 out of the last 30 occurrences, or 80% of the time, the S&P500 closed higher the following session, significantly above the 55% at-any-time odds for a higher S&P close one day later.

Thursday’s upside gap also has bullish implications from a longer-term perspective, given that it comes just three days after another unfilled upside gap on December 21^st. When sellers can’t drive the market lower to fill a gap and then a second upside gap appears, it’s usually a sign that sellers are overwhelmed. While conditions can often turn choppy after the second gap, the market has a good track record of rebounding from short-term weakness and settling flat-to-higher one month later. The table below lists each of the last thirty instances in which two unfilled upside gaps formed within a one-month time frame, along with the performance of the S&P500 looking out twenty trading days. To qualify for inclusion, the first gap must remain unfilled when the second gap appears.

Two Unfilled Upside Gaps In a One-Month Time Frame
12/21/09 & 12/24/09… S&P500 ??? one month later
12/10/09 & 12/14/09… S&P500 +1.2% one month later (open – ends 1/13)
11/09/09 & 11/16/09… S&P500 +0.2% one month later
10/08/09 & 10/14/09… S&P500 +0.8% one month later
10/06/09 & 10/08/09… S&P500 -0.1% one month later
07/30/09 & 08/21/09… S&P500 +3.8% one month later
07/15/09 & 07/30/09… S&P500 +4.5% one month later
04/02/09 & 04/09/09… S&P500 +8.5% one month later
11/24/08 & 12/08/08… S&P500 -0.3% one month later
04/16/08 & 04/18/08… S&P500 +2.5% one month later
03/18/08 & 03/24/08… S&P500 +2.8% one month later
12/21/07 & 12/24/07… S&P500 -10.2% one month later (*)
11/28/07 & 12/05/07… S&P500 -5.0% one month later (*)
04/16/07 & 04/20/07… S&P500 +2.3% one month later
04/03/07 & 04/16/07… S&P500 +2.3% one month later
06/15/06 & 06/29/06… S&P500 -0.1% one month later
10/31/05 & 11/17/05… S&P500 +1.7% one month later
05/18/05 & 05/26/05… S&P500 -0.6% one month later
10/01/04 & 10/04/04… S&P500 -0.4% one month later
11/24/03 & 12/01/03… S&P500 +3.8% one month later
03/13/03 & 04/02/03… S&P500 +4.3% one month later
10/15/02 & 10/17/02… S&P500 +2.7% one month later
10/11/02 & 10/15/02… S&P500 +0.2% one month later
11/13/01 & 12/05/01… S&P500 +0.5% one month later
11/05/01 & 11/13/01… S&P500 -0.3% one month later
09/24/01 & 09/28/01… S&P500 +5.6% one month later
04/10/01 & 04/18/01… S&P500 +3.4% one month later
10/28/99 & 10/29/99… S&P500 +2.5% one month later
03/25/99 & 03/29/99… S&P500 +4.6% one month later
03/05/99 & 03/25/99… S&P500 +4.7% one month later
11/23/98 & 11/27/98… S&P500 +2.3% one month later
10/30/98 & 11/23/98… S&P500 +0.8% one month later

In 22 out of the last 30 cases, or 73% of the time, the S&P500 was trading higher one month later. That’s not significantly better than the 56% random odds of a higher S&P one month later. But note that of the eight times the S&P failed to rally, it finished down 1%+ one month later only two times out of thirty (or 7% of the time). In the same period, the random chance for a drop of 1%+ over any twenty-day period was much higher at 35%. So when two unfilled upside gaps appear in a short period of time, we can infer downside potential is likely to be limited (<1%) over the coming month.

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

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