SPX Running into Long-term Trendline Resistance

Despite 3:2 positive breadth on each of the last four sessions, our version of Standard & Poors’ Oscillator has declined the last three days. The Oscillator is a breadth-based indicator – inputs are advancing issues, unchanged issues, total issues and price, so it’s noteworthy when the indicator and breadth diverge. Looking back at the last thirty instances in which the S&P rallied two days and the Oscillator declined both days, there has been a definitive tendency for the S&P to reverse course and trade lower over the next couple of days…

S&P500 Up Two, S&P Oscillator Down Two
01/08/10… S&P500 ??? two sessions later
01/07/10… S&P500 ??? two sessions later
12/01/09… S&P500 -0.8% two sessions later
09/04/09… S&P500 +1.7% two sessions later (*)
08/27/09… S&P500 -1.0% two sessions later
06/12/09… S&P500 -3.6% two sessions later
04/24/09… S&P500 -1.3% two sessions later
04/01/09… S&P500 +3.9% two sessions later (*)
01/16/09… S&P500 -1.2% two sessions later
09/12/08… S&P500 -3.0% two sessions later
09/11/08… S&P500 -4.5% two sessions later
09/08/08… S&P500 -2.8% two sessions later
07/01/08… S&P500 -1.7% two sessions later
04/07/08… S&P500 -1.3% two sessions later
12/13/07… S&P500 -2.9% two sessions later
04/18/07… S&P500 +0.8% two sessions later
02/07/07… S&P500 -0.8% two sessions later
10/19/06… S&P500 +0.7% two sessions later
10/10/06… S&P500 +0.7% two sessions later
09/27/06… S&P500 -0.1% two sessions later
01/24/06… S&P500 +0.6% two sessions later
11/07/05… S&P500 -0.2% two sessions later
09/16/05… S&P500 -1.3% two sessions later
08/03/05… S&P500 -1.5% two sessions later
07/14/05… S&P500 -0.4% two sessions later
02/16/05… S&P500 -0.7% two sessions later
02/15/05… S&P500 -0.8% two sessions later
12/09/04… S&P500 +0.8% two sessions later
11/18/04… S&P500 -0.5% two sessions later
10/18/04… S&P500 -0.9% two sessions later
02/26/04… S&P500 +1.0% two sessions later
02/03/04… S&P500 -0.7% two sessions later

In 22 out of the last 30 occurrences, or 73% of the time, the S&P closed lower two sessions later, significantly above the 48% at-any-time odds for a lower S&P close two days later in the same time frame. The market was up more than 1% over next two days only twice, while it lost more than 1% eleven times. This setup was triggered on both Thursday and Friday of last week, suggesting the potential for short-term weakness to kick off expiration week.

On the plus side, the CBOE equity put/call ratio also fell into a steady decline at the end of last week, which has positive implications looking out three trading days. Historically, three consecutive days of a declining equity put/call ratio means the market is likely to remain on firm footing over the following three sessions. The last thirty separate instances in which the closing CBOE equity put/call ratio initially declined from the previous session three consecutive days are listed below…

CBOE Equity Put/Call Ratio Declines Three Days
01/08/10… S&P500 ??? three sessions later
11/04/09… S&P500 +4.5% three sessions later
08/20/09… S&P500 +2.1% three sessions later
08/05/09… S&P500 +0.4% three sessions later
07/13/09… S&P500 +4.4% three sessions later
04/13/09… S&P500 +0.8% three sessions later
03/10/09… S&P500 +5.1% three sessions later
01/23/09… S&P500 +5.1% three sessions later
12/23/08… S&P500 +0.7% three sessions later
12/17/08… S&P500 -3.6% three sessions later
10/29/08… S&P500 +3.9% three sessions later
08/22/08… S&P500 -0.8% three sessions later
07/18/08… S&P500 +1.7% three sessions later
04/02/08… S&P500 +0.4% three sessions later
03/13/08… S&P500 +1.2% three sessions later
12/28/07… S&P500 -2.1% three sessions later
09/21/07… S&P500 -0.0% three sessions later
08/31/07… S&P500 +0.3% three sessions later
08/17/07… S&P500 +1.3% three sessions later
07/09/07… S&P500 +1.0% three sessions later
06/28/07… S&P500 +1.3% three sessions later
06/14/07… S&P500 +0.7% three sessions later
04/02/07… S&P500 +1.4% three sessions later
02/15/07… S&P500 +0.1% three sessions later
01/11/07… S&P500 +0.5% three sessions later
11/15/06… S&P500 +0.3% three sessions later
10/23/06… S&P500 +0.9% three sessions later
10/12/06… S&P500 +0.1% three sessions later
04/19/06… S&P500 -0.1% three sessions later
02/09/06… S&P500 +0.9% three sessions later
12/23/05… S&P500 -1.1% three sessions later

In 24 out of the last 30 occurrences, or 80% of the time, the S&P500 settled higher three trading days later, significantly above the 54% random chance of a higher S&P three sessions later in the same time frame. If the Oscillator proves correct early this week in its call for weakness, the persistent decline in the equity put/call ratio should put us on alert for a midweek rebound.

From a longer-term perspective, it’s noteworthy that the S&P is only about 10 points away from potentially major trendline resistance in the SPX 1155 area. Pull up this long-term logarithmic chart stretching back to the 30’s and note that the S&P fell back into the channel during the 2008 crash and is now challenging the upper end of that channel. If it’s going to hold, the S&P should have a difficult time surmounting 1155.

While most longer-term indications we’ve reviewed have bullish implications for this year (new all-time high for Cumulative Breadth, cluster of 400+ new 52-week highs, etc), there are a few negative divergences still in effect. Note from the long-term chart of cumulative TICKscore that we’re still holding below the October high, indicating tepid institutional participation over the last couple of months. It’s also pretty remarkable that we’re not seeing more of an uptick in the Put/Call Open Interest Ratio for index options. This statistic normally vaults over the 1.30 level during healthy stock rallies as institutions hedge their upside exposure with index puts. Despite the monstrous rally off the ’09 bottom, we’re still not seeing that type of hedging activity.

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

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