More on New 20-day Lows and Overbought Volatility
By
Rennie on Sunday, January 24th, 2010 at 4:04 pm
On Friday I mentioned that the NYSE McClellan Oscillator was set to close below the -200 level. While readings this low used to be a fairly reliable short-term buy signal, that reliability has faltered in recent years. Out of the last ten separate occurrences of a -200 Oscillator, all but one led to a subsequently lower S&P close within the next couple of days despite the extremely oversold conditions.
Another development also points to a close below Friday’s settlement before the end of the coming week. New 20-day lows surged to over 2,300 issues across all major exchanges, signaling broad participation during Friday’s selloff. Historically, readings this high have led to further weakness over the short-term. In the table below I’ve listed each instance over the last six years in which 20-day lows exceeded 2,000 for the first time in at least three sessions…
New 20-day Lows Top 2,000 First Time in Three Days
01/22/10… ???
10/28/09… Lower S&P close two sessions later
07/08/09… Lower S&P close two sessions later
02/17/09… Lower S&P close one session later
01/15/09… Lower S&P close two sessions later
11/13/08… Lower S&P close one session later
10/24/08… Lower S&P close one session later
09/29/08… Lower S&P close four sessions later
09/05/08… Lower S&P close two sessions later
06/20/08… Lower S&P close two sessions later
06/10/08… Lower S&P close one session later
03/17/08… No lower close within next four days
03/03/08… Lower S&P close one session later
01/16/08… Lower S&P close one session later
01/04/08… Lower S&P close two sessions later
11/19/07… Lower S&P close two sessions later
10/22/07… No lower close within next four days
08/10/07… Lower S&P close one session later
07/24/07… Lower S&P close two sessions later
02/27/07… Lower S&P close three sessions later
06/08/06… Lower S&P close one session later
05/15/06… Lower S&P close one session later
10/12/05… Lower S&P close one session later
10/06/05… Lower S&P close two sessions later
04/15/05… Lower S&P close three sessions later
03/23/05… Lower S&P close one session later
08/06/04… Lower S&P close four sessions later
07/22/04… Lower S&P close one session later
05/07/04… Lower S&P close one session later
04/29/04… Lower S&P close one session later
Note that in 27 out of 29 cases, or 93% of the time, the S&P500 posted a lower close (below the setup day’s close) within the next four sessions, significantly above the 72% random chance in the same time frame. This is a good indication that barring any significant new developments, a bounce to start the week will most likely represent a short-term selling opportunity. Conversely, should we continue lower without a bounce on Monday, short-term sells will be fulfilled and we’ll most likely look for higher prices heading into Wednesday’s FOMC announcement.
Last week I noted that most ‘overbought volatility’ buy signals that I follow have performed erratically in recent years. One exception is a signal that was triggered Friday for the first time in over a year – back-to-back 10%+ gains for the S&P100 Volatility Index (VXO). Consecutive gains of this magnitude are fairly rare and reflect a sharp increase in implied volatility levels of OEX options. Historically, this has usually translated into a higher stock market three or five trading days later as the market absorbs the uptick in fear. Every instance of back-to-back 10%+ up days since inception of the VXO are listed below. Note that in 24 out of 26 occurrences, the OEX closed at a higher level three or five sessions later, and that downside was limited to less than 1% when a rally failed to materialize…
VXO Rallies 10% Two Consecutive Sessions
01/22/10… OEX ???
11/06/08… OEX +0.0% three days later
10/10/08… OEX +1.6% three days later
07/27/07… OEX +0.4% three days later
06/07/07… OEX +0.1% three days later
11/27/06… OEX +1.1% three days later
07/13/06… OEX +0.9% five days later
06/13/06… OEX +2.2% three days later
04/14/05… OEX -0.2% five days later (*)
08/06/04… OEX +0.9% three days later
03/11/04… OEX +0.3% three days later
01/27/03… OEX +1.5% five days later
03/12/01… OEX -0.6% five days later (*)
10/12/00… OEX +1.1% three days later
05/03/00… OEX +0.3% three days later
10/13/99… OEX +1.2% five days later
01/12/99… OEX +1.5% five days later
10/01/98… OEX +0.3% three days later
12/11/97… OEX +1.3% three days later
03/31/97… OEX +0.6% five days later
07/23/96… OEX +1.7% three days later
01/10/96… OEX +0.4% three days later
11/04/93… OEX +0.5% three days later
02/07/91… OEX +2.3% three days later
08/06/90… OEX +1.6% three days later
10/19/87… OEX +12.6% three days later
09/12/86… OEX +0.3% three days later
More on New 20-day Lows and Overbought Volatility
By Rennie on Sunday, January 24th, 2010 at 4:04 pmOn Friday I mentioned that the NYSE McClellan Oscillator was set to close below the -200 level. While readings this low used to be a fairly reliable short-term buy signal, that reliability has faltered in recent years. Out of the last ten separate occurrences of a -200 Oscillator, all but one led to a subsequently lower S&P close within the next couple of days despite the extremely oversold conditions.
Another development also points to a close below Friday’s settlement before the end of the coming week. New 20-day lows surged to over 2,300 issues across all major exchanges, signaling broad participation during Friday’s selloff. Historically, readings this high have led to further weakness over the short-term. In the table below I’ve listed each instance over the last six years in which 20-day lows exceeded 2,000 for the first time in at least three sessions…
New 20-day Lows Top 2,000 First Time in Three Days
01/22/10… ???
10/28/09… Lower S&P close two sessions later
07/08/09… Lower S&P close two sessions later
02/17/09… Lower S&P close one session later
01/15/09… Lower S&P close two sessions later
11/13/08… Lower S&P close one session later
10/24/08… Lower S&P close one session later
09/29/08… Lower S&P close four sessions later
09/05/08… Lower S&P close two sessions later
06/20/08… Lower S&P close two sessions later
06/10/08… Lower S&P close one session later
03/17/08… No lower close within next four days
03/03/08… Lower S&P close one session later
01/16/08… Lower S&P close one session later
01/04/08… Lower S&P close two sessions later
11/19/07… Lower S&P close two sessions later
10/22/07… No lower close within next four days
08/10/07… Lower S&P close one session later
07/24/07… Lower S&P close two sessions later
02/27/07… Lower S&P close three sessions later
06/08/06… Lower S&P close one session later
05/15/06… Lower S&P close one session later
10/12/05… Lower S&P close one session later
10/06/05… Lower S&P close two sessions later
04/15/05… Lower S&P close three sessions later
03/23/05… Lower S&P close one session later
08/06/04… Lower S&P close four sessions later
07/22/04… Lower S&P close one session later
05/07/04… Lower S&P close one session later
04/29/04… Lower S&P close one session later
Note that in 27 out of 29 cases, or 93% of the time, the S&P500 posted a lower close (below the setup day’s close) within the next four sessions, significantly above the 72% random chance in the same time frame. This is a good indication that barring any significant new developments, a bounce to start the week will most likely represent a short-term selling opportunity. Conversely, should we continue lower without a bounce on Monday, short-term sells will be fulfilled and we’ll most likely look for higher prices heading into Wednesday’s FOMC announcement.
Last week I noted that most ‘overbought volatility’ buy signals that I follow have performed erratically in recent years. One exception is a signal that was triggered Friday for the first time in over a year – back-to-back 10%+ gains for the S&P100 Volatility Index (VXO). Consecutive gains of this magnitude are fairly rare and reflect a sharp increase in implied volatility levels of OEX options. Historically, this has usually translated into a higher stock market three or five trading days later as the market absorbs the uptick in fear. Every instance of back-to-back 10%+ up days since inception of the VXO are listed below. Note that in 24 out of 26 occurrences, the OEX closed at a higher level three or five sessions later, and that downside was limited to less than 1% when a rally failed to materialize…
VXO Rallies 10% Two Consecutive Sessions
01/22/10… OEX ???
11/06/08… OEX +0.0% three days later
10/10/08… OEX +1.6% three days later
07/27/07… OEX +0.4% three days later
06/07/07… OEX +0.1% three days later
11/27/06… OEX +1.1% three days later
07/13/06… OEX +0.9% five days later
06/13/06… OEX +2.2% three days later
04/14/05… OEX -0.2% five days later (*)
08/06/04… OEX +0.9% three days later
03/11/04… OEX +0.3% three days later
01/27/03… OEX +1.5% five days later
03/12/01… OEX -0.6% five days later (*)
10/12/00… OEX +1.1% three days later
05/03/00… OEX +0.3% three days later
10/13/99… OEX +1.2% five days later
01/12/99… OEX +1.5% five days later
10/01/98… OEX +0.3% three days later
12/11/97… OEX +1.3% three days later
03/31/97… OEX +0.6% five days later
07/23/96… OEX +1.7% three days later
01/10/96… OEX +0.4% three days later
11/04/93… OEX +0.5% three days later
02/07/91… OEX +2.3% three days later
08/06/90… OEX +1.6% three days later
10/19/87… OEX +12.6% three days later
09/12/86… OEX +0.3% three days later