Volatility Oversold Heading into the Christmas Break

TICKscore and Cumulative TICK both settled near the zero level Tuesday as institutional participation remained nonexistent. However, it’s interesting to note that the cumulative Adjusted TICK, which compares today’s NYSE TICK to the average of the past twenty sessions, has begun falling into a series of lower lows.

Tuesday’s rally sent the VXO into oversold territory (under its lower bollinger band), suggesting limited upside potential heading into next Monday. The last thirty times the OEX volatility index initially closed under its lower band are listed below…

VXO Closes Under its Lower Bollinger Band
12/22/09… OEX ??? three sessions later
06/29/09… OEX -3.0% three sessions later
05/18/09… OEX -2.4% three sessions later
05/04/09…  OEX +0.0% three sessions later
04/17/09…  OEX -3.4% three sessions later
04/09/09… OEX -0.6% three sessions later
12/19/08… OEX -1.7% three sessions later
05/19/08…  OEX -2.5% three sessions later
02/25/08…  OEX -0.1% three sessions later
12/21/07…  OEX -0.5% three sessions later
09/21/07…  OEX +0.1% three sessions later
11/17/06…  OEX +0.2% three sessions later
08/16/06…  OEX +0.5% three sessions later
11/03/05…  OEX +0.1% three sessions later
09/09/05… OEX -1.1% three sessions later
06/21/05…  OEX -1.9% three sessions later
04/12/05…  OEX -3.2% three sessions later
02/04/05… OEX -0.5% three sessions later
02/01/05…  OEX +1.2% three sessions later (*)
12/21/04…  OEX +0.1% three sessions later
06/08/04…  OEX -1.2% three sessions later
07/25/03…  OEX -1.1% three sessions later
05/16/03…  OEX -2.2% three sessions later
04/17/03…  OEX +3.0% three sessions later (*)
04/14/03…  OEX +0.9% three sessions later
11/20/02…  OEX +2.1% three sessions later (*)
11/15/02…  OEX +0.7% three sessions later
12/27/01…  OEX -0.3% three sessions later
12/19/01…  OEX -0.6% three sessions later
10/26/01…  OEX -4.2% three sessions later
05/21/01…  OEX -1.5% three sessions later

In 19 out of 30 cases, or 63% of the time, the S&P500 closed lower three days later vs. 47% at-any-time odds for a lower S&P three sessions later. While not quite accurate enough to make the cut for a sell signal, note that in the majority of cases this setup has translated into limited upside potential over the next few sessions. In only three cases out of thirty (with the last occurrence in 2005), or 10% of the time, was the OEX up 1% or more three days later. The oversold volatility tells us to be on the lookout for a potential post-Christmas selloff.

The table below highlights those instances in which the VXO closed under its lower bollinger band and the OEX violated that day’s intraday low (considered the entry price) within two sessions. Note that in the majority of cases, the OEX ended up closing below the entry, and in only one case out of thirty did it end up more than 0.4% above the entry.  This signal will be triggered on a break of OEX 514.19 either Wednesday or Thursday.

VXO Under Lower Band, OEX Violates Setup Day’s Low Within Two Days
06/29/09… 06/30/09 Sell @ OEX 428.15… OEX +0.4% at the close
05/19/09… 05/20/09 Sell @ OEX 905.22… OEX -0.2% at the close
05/06/09… 05/07/09 Sell @ OEX 903.95… OEX +0.4% at the close
04/17/09… 04/20/09 Sell @ OEX 403.42… OEX -3.4% at the close
12/19/08… 12/22/08 Sell @ OEX 422.45… OEX -0.9% at the close
05/19/08… 05/20/08 Sell @ OEX 650.85… OEX -0.8% at the close
12/24/07… 12/27/07 Sell @ OEX 693.69… OEX -0.5% at the close
09/21/07… 09/24/07 Sell @ OEX 710.47… OEX -0.1% at the close
11/21/06… 11/24/06 Sell @ OEX 651.49… OEX -0.1% at the close
08/21/06… 08/22/06 Sell @ OEX 598.91… OEX +0.2% at the close
11/03/05… 11/04/05 Sell @ OEX 559.46… OEX +0.4% at the close
09/09/05… 09/13/05 Sell @ OEX 570.83… OEX -0.2% at the close
06/21/05… 06/23/05 Sell @ OEX 570.37… OEX -1.0% at the close
04/12/05… 04/14/05 Sell @ OEX 558.26… OEX -0.5% at the close
02/02/05… 02/03/05 Sell @ OEX 567.93… OEX +0.1% at the close
12/23/04… 12/27/04 Sell @ OEX 574.72… OEX -0.2% at the close
06/08/04… 06/09/04 Sell @ OEX 553.43… OEX -0.2% at the close
05/16/03… 05/19/03 Sell @ OEX 473.48… OEX -2.0% at the close
04/15/03… 04/16/03 Sell @ OEX 447.88… OEX -0.3% at the close
11/15/02… 11/19/02 Sell @ OEX 456.09… OEX +0.4% at the close
11/22/02… 11/25/02 Sell @ OEX 474.23… OEX +0.6% at the close
12/27/01… 12/31/01 Sell @ OEX 587.31… OEX -0.5% at the close
10/26/01… 10/29/01 Sell @ OEX 562.48… OEX -1.6% at the close
05/21/01… 05/23/01 Sell @ OEX 665.42… OEX +0.1% at the close
08/08/00… 08/10/00 Sell @ OEX 799.13… OEX -0.0% at the close
06/07/99… 06/08/99 Sell @ OEX 671.44… OEX -0.9% at the close
04/22/98… 04/23/98 Sell @ OEX 543.97… OEX -0.5% at the close
09/22/97… 09/23/97 Sell @ OEX 458.31… OEX +0.3% at the close
09/23/97… 09/24/97 Sell @ OEX 457.97… OEX -0.4% at the close
01/22/97… 01/23/97 Sell @ OEX 381.76… OEX -0.2% at the close

Tuesday’s follow-through session for S&P futures after Monday’s unfilled upside gap suggests we may not see any real weakness until after the Christmas break. A higher high, low and close immediately after an unfilled upside gap reflects underlying bullish momentum that usually leads to a flat-to-up S&P two trading days later. The last thirty times that the front-month S&P contract posted a higher high, low and close immediately after an unfilled upside gap are listed in the table below…

S&P Futures Post Higher High, Low & Close After Upside Gap
12/22/09… S&P futures ??? two sessions later
12/11/09… S&P futures +0.1% two sessions later
11/10/09… S&P futures -0.4% two sessions later
10/15/09… S&P futures +0.1% two sessions later
10/09/09… S&P futures +0.1% two sessions later
09/09/09… S&P futures +0.9% two sessions later
07/16/09… S&P futures +1.4% two sessions later
06/02/09… S&P futures -0.2% two sessions later
05/05/09… S&P futures +0.4% two  sessions later
04/13/09… S&P futures -0.6% two sessions later
11/25/08… S&P futures +4.9% two sessions later
04/17/08… S&P futures +1.2% two sessions later
04/02/08… S&P futures +0.1% two sessions later
12/24/07… S&P futures -1.1% two sessions later (*)
12/06/07… S&P futures +0.8% two sessions later
11/29/07… S&P futures +0.3% two sessions later
07/13/07… S&P futures -0.1% two sessions later
04/17/07… S&P futures +0.1% two sessions later
02/15/07… S&P futures +0.2% two sessions later
11/30/06… S&P futures +0.6% two sessions later
08/17/06… S&P futures +0.1% two sessions later
11/18/05… S&P futures +1.0% two sessions later
05/27/05… S&P futures +0.1% two sessions later
05/19/05… S&P futures +0.4% two sessions later
02/01/05… S&P futures +0.0% two sessions later
10/04/04… S&P futures +0.6% two sessions later
04/05/04… S&P futures -0.5% two sessions later
11/25/03… S&P futures +0.4% two sessions later
03/14/03… S&P futures +4.0% two sessions later
01/03/03… S&P futures +1.5% two sessions later
11/15/02… S&P futures -1.2% two  sessions later (*)

In 23 out of the last 30 occurrences, or 77% of the time, the S&Ps settled at a higher level two sessions later, well above the 52% random odds of a higher S&P two days later. Only two cases led to an S&P down more than 0.6% two sessions later.

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

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