Back-to-back Outside Bars on the Weekly S&P500 Chart

The week is only two days old, but we’ve already seen the S&P500 trade above last week’s high and below last week’s low, creating a second consecutive outside bar on the weekly chart. That’s a clear sign that volatility is picking up, and history indicates the pickup in volatility will likely lead to another lower weekly close within the next couple of weeks. There have only been eleven instances since 1960 in which the S&P posted back-to-back outside weeks, so it’s not a statistically significant sample. Nonetheless, I found it noteworthy that the S&P posted a subsequently lower weekly close within the next two weeks in 10 out of 11 cases…

Back-to-Back Outside Weeks for S&P500
04/30/10… ???
01/12/07… Lower weekly close one week later
09/15/06… Lower weekly close one week later
01/06/06… Lower weekly close two weeks later
10/01/04… Lower weekly close one week later
06/23/00… Lower weekly close five weeks later (*)
02/04/94… Lower weekly close two weeks later
08/23/91… Lower weekly close two weeks later
10/07/83… Lower weekly close one week later
07/29/83… Lower weekly close one week later
07/18/75… Lower weekly close one week later
11/02/73… Lower weekly close one week later

Interestingly, should the S&P close back over 1192 at the end of the week, it would bolster the outlook for a lower weekly close. Here’s a look at the last thirty instances in which the S&P500 posted two lower lows on its weekly chart but closed above its two-week ago close. Note that in the majority of cases the recovery from lower lows proved temporary…

Two Lower Lows on SPX Weekly, Close > Two-Week Ago Close
02/13/09… Lower weekly close one week later
01/02/09… Lower weekly close one week later
10/31/08… Lower weekly close one week later
09/19/08… Lower weekly close one week later
03/20/08… Lower weekly close one week later
11/30/07… Lower weekly close two weeks later
08/17/07… No lower weekly close in next 1-2 weeks
01/12/07… Lower weekly close one week later
09/15/06… Lower weekly close one week later
04/21/06… Lower weekly close one week later
01/06/06… Lower weekly close two weeks later
07/08/05… No lower weekly close in next 1-2 weeks
10/29/04… No lower weekly close in next 1-2 weeks
10/01/04… Lower weekly close one week later
07/30/04… Lower weekly close one week later
04/23/04… Lower weekly close one week later
07/25/03… Lower weekly close one week later
01/03/03… Lower weekly close two weeks later
10/11/02… No lower weekly close in next 1-2 weeks
04/19/02… Lower weekly close one week later
03/03/00… Lower weekly close one week later
01/15/99… Lower weekly close one week later
04/18/97… Lower weekly close one week later
03/07/97… Lower weekly close one week later
12/20/96… Lower weekly close two weeks later
09/16/94… Lower weekly close one week later
06/25/93… Lower weekly close one week later
05/21/93… No lower weekly close in next 1-2 weeks
04/10/92… No lower weekly close in next 1-2 weeks
12/06/91… No lower weekly close in next 1-2 weeks

In 23 out of the  last 30 occurrences, or 77% of the time, the S&P posted a subsequently lower weekly close within the next two weeks, significantly above the 57% random chance in the same time frame. The S&P needs to end the week above 1192 to draw this price pattern.

While intermediate-term indications are pointing towards a period of consolidation, it’s still within the context of an emerging bubble. The S&P recently broke back over its long-term trendline channel, suggesting the potential of another overbought breakout, and it remains about 1% over that line (currently at SPX 1168). The CBOE equity put/call ratio didn’t budge from its trend of persistently low readings even with Tuesday’s selloff, closing at a relatively low .57. The ‘buy the dip’ mentality remains alive and well in trade reminiscent of the 1998-1999 time frame, the last time we witnessed such a long string of unusually low equity put/call ratios. Since the February bottom, the S&P has closed higher after a day with lower lows in 15 out of 16 occurrences, and indications suggest that streak will continue on Wednesday.

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

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