Elevated 20-day Lows Face Off Against Elevated Volatility

Stocks are sliding lower for the third consecutive session as institutional selling pressure continues to build. TICKscore currently stands at -26, Cumulative TICK -40,000. Volume is very heavy, with ES volume approaching 2.5 million contracts. We’re still not seeing any definitive short-term signals. Nasdaq Volatility Index (VXN) is set to close over its upper bollinger band for a second consecutive session. Historically, this has been a decent indication that the Nasdaq will close flat-to-higher the following session as volatility falls out of technically overbought territory. We only have historical data on the VXN since the beginning of 2001, but since that time we’ve seen a total of 29 separate instances in which the VXN closed over its upper band two days running. All of these occurrences are noted in the table below, along with the performance of the Nasdaq100 the following session…

VXN Over Its Upper Band Two Consecutive Sessions
11/02/09… Nasdaq100 +0.4% next session
10/02/09… Nasdaq100 +0.8% next session
09/01/09… Nasdaq100 -0.1% next session
10/07/08… Nasdaq100 +0.1% next session
06/09/08… Nasdaq100 -0.4% next session
03/17/08… Nasdaq100 +4.4% next session
11/09/07… Nasdaq100 -2.6% next session (*)
10/22/07… Nasdaq100 +2.2% next session
10/16/07… Nasdaq100 +1.3% next session
08/01/07… Nasdaq100 +1.1% next session
07/27/07… Nasdaq100 +0.9% next session
02/28/07… Nasdaq100 -0.5% next session
07/14/06… Nasdaq100 +0.4% next session
05/18/06… Nasdaq100 +0.9% next session
05/15/06… Nasdaq100 -0.7% next session
04/12/06… Nasdaq100 +0.4% next session
01/23/06… Nasdaq100 +0.6% next session
01/18/06… Nasdaq100 +0.8% next session
01/10/06… Nasdaq100 +0.8% next session
08/08/05… Nasdaq100 +0.7% next session
04/18/05… Nasdaq100 +0.8% next session
07/26/04… Nasdaq100 +1.7% next session
04/30/04… Nasdaq100 +1.0% next session
03/11/04… Nasdaq100 +2.1% next session
11/18/03… Nasdaq100 +1.0% next session
06/09/03… Nasdaq100 +1.5% next session
06/11/02… Nasdaq100 +2.0% next session
05/06/02… Nasdaq100 -0.2% next session
09/07/01… Nasdaq100 +0.8% next session

Note that in 23 out of 29 cases, the Nasdaq proceeded to close higher the following session. That 79% win rate is significantly above the 53% random chance for a higher NDX close one day later in the same time frame. Only one signal led to a loss of 1% or more the next session, while ten signals led to a gain of 1%+ the next day.

However, as I mentioned yesterday I’m not a huge fan of ‘overbought volatility’ buy signals as I haven’t found them to be consistently reliable. See this column from early November for a bit more background… – http://markettells.com/2009/11/volatility-overbought-stock-market-still-oversold/

I’d also note that new 20-day lows remain elevated with nearly 1,900 issues across all exchanges hitting a fresh 20-day low today. That makes the second day in a row this statistic has closed above the 1,500 level. In the table below I’ve extracted the last thirty instances in which new 20-day lows initially exceeded 1,500 on day one and then continued to increase the following session (this is the date listed in the table below)…

New 20-Day Lows Top 1500, Continue to Increase Next Day
01/22/10… S&P500 ??? next session
10/28/09… S&P500 +2.3% next session
06/23/09… S&P500 +0.7% next session
03/06/09… S&P500 -1.0% next session
03/02/09… S&P500 -0.6% next session
02/20/09… S&P500 -3.5% next session
02/18/09… S&P500 -1.2% next session
01/15/09… S&P500 +0.8% next session
11/19/08… S&P500 -6.7% next session
11/13/08… S&P500 -4.2% next session
10/28/08… S&P500 -1.1% next session
10/24/08… S&P500 -3.2% next session
10/10/08… S&P500 +11.6% next session
10/08/08… S&P500 -7.6% next session
10/03/08… S&P500 -3.9% next session
09/16/08… S&P500 -4.7% next session
09/11/08… S&P500 +0.2% next session
09/05/08… S&P500 +2.1% next session
07/15/08… S&P500 +2.5% next session
07/11/08… S&P500 -0.9% next session
07/03/08… S&P500 -0.8% next session
07/01/08… S&P500 -1.8% next session
06/27/08… S&P500 +0.1% next session
06/19/08… S&P500 -1.9% next session
06/10/08… S&P500 -1.7% next session
03/14/08… S&P500 -0.9% next session
03/07/08… S&P500 -1.6% next session
03/03/08… S&P500 -0.3% next session
01/16/08… S&P500 -2.9% next session
01/09/08… S&P500 +0.8% next session
11/27/07… S&P500 +2.9% next session

Note that in 20 out of the last 30 occurrences, or 67% of the time, the S&P closed lower the next session despite oversold conditions, significantly greater than the 46% at-any-time odds for a lower SPX close one day later in the same time frame. In only five cases did the S&P close up 1% or more the following session, while it fell 1%+ fifteen times. The mixed signals continue to suggest standing aside until a clearer short-term edge develops.

Categories : Archived Intraday Commentary, Intraday Commentary

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