Stocks Surge Higher, NASDAQ Volume Hits a New High for 2010

Stock indexes gapped higher at the open and never looked back, shrugging off Tuesday’s weak recovery pattern. Over 600 issues hit new 52-week highs on the NYSE and over 300 on the NASDAQ – both the largest number of  new highs this year. Volume was unusually heavy, with NASDAQ volume hitting 3.1 billion shares (also the highest reading this year). Note today’s .32 closing equity put/call ratio, a level not seen a single time since 1999-2000, reinforcing the idea of an emerging equity bubble.

With the S&P up over 1% during this expiration week, it looks like we’ll see a short-term bullish signal take effect at Thursday’s close. When the S&P trades higher in the first four days of expiration week, odds strongly favor a higher close either on expiration Friday or the following Monday. This doesn’t mean the S&P must close higher on Monday through Thursday of expiration week, only that as of Thursday’s close the S&P is up vs. the previous Friday. Here are each of the last thirty occurrences…

S&P Up First Four Days of Expiration Week
03/18/10… No higher SPX close in next 1-2 days
02/18/10… Higher SPX close one session later
01/14/10… Higher SPX close two sessions later
11/19/09… Higher SPX close two sessions later
10/15/09… Higher SPX close two sessions later
09/17/09… Higher SPX close one session later
08/20/09… Higher SPX close one session later
07/16/09… Higher SPX close two sessions later
04/16/09… Higher SPX close one session later
03/19/09… Higher SPX close two sessions later
12/18/08… Higher SPX close one session later
10/16/08… Higher SPX close two sessions later
07/17/08… Higher SPX close one session later
05/15/08… Higher SPX close one session later
04/17/08… Higher SPX close one session later
02/14/08… Higher SPX close one session later
09/20/07… Higher SPX close one session later
07/19/07… No higher SPX close in next 1-2 days
06/14/07… Higher SPX close one session later
05/17/07… Higher SPX close one session later
04/19/07… Higher SPX close one session later
02/15/07… Higher SPX close two sessions later
01/18/07… Higher SPX close one session later
12/14/06… Higher SPX close one session later
11/16/06… Higher SPX close one session later
10/19/06… Higher SPX close one session later
09/14/06… Higher SPX close one session later
08/17/06… Higher SPX close one session later
07/20/06… Higher SPX close two sessions later
06/15/06… No higher SPX close in next 1-2 days

Note that in 27 out of the last 30 occurrences, or 90% of the time, the S&P500 posted a subsequently higher close (above the setup day’s close) within the next two sessions, significantly above the 67% random chance for a close above today’s settlement within the next two days. This setup will go into effect at Thursday’s close as long as the S&P remains above 1194.

The 14-day RSI for the S&P500 soared past the 75 level  Wednesday, a bullish sign from a longer-term perspective. Recent performance has been so strong (S&P up one month later 23 out of last 25 occurrences) that this probably should be considered a buy signal all on its own…

S&P500 14-day RSI Closes Over 75
04/14/10 RSI >75… S&P ??? one month later
03/17/10 RSI >75… S&P +3.8% one month later* (ends Thursday)
08/03/09 RSI >75… S&P +1.8% one month later
10/23/06 RSI >75… S&P +1.7% one month later
11/12/04 RSI >75… S&P +1.2% one month later
01/21/04 RSI >75… S&P -0.0% one month later
01/05/04 RSI >75… S&P +1.2% one month later
11/23/98 RSI >75… S&P +1.3% one month later
04/02/98 RSI >75… S&P +0.1% one month later
03/19/98 RSI >75… S&P +3.0% one month later
06/19/97 RSI >75… S&P +1.9% one month later
06/12/97 RSI >75… S&P +3.8% one month later
11/13/96 RSI >75… S&P -0.3% one month later
11/07/96 RSI >75… S&P +1.6% one month later
10/04/96 RSI >75… S&P +0.3% one month later
02/07/96 RSI >75… S&P +0.6% one month later
12/05/95 RSI >75… S&P +0.0% one month later
09/11/95 RSI >75… S&P +0.8% one month later
06/22/95 RSI >75… S&P +0.5% one month later
05/03/95 RSI >75… S&P +2.5% one month later
04/13/95 RSI >75… S&P +3.2% one month later
04/06/95 RSI >75… S&P +2.8% one month later
03/24/95 RSI >75… S&P +2.4% one month later
02/24/95 RSI >75… S&P +2.6% one month later
02/10/95 RSI >75… S&P +1.8% one month later
02/03/95 RSI >75… S&P +1.5% one month later

When we look back over the last 30 occurrences, we find the overall accuracy falls just short of statistically significant. However, we should keep an eye out for the first RSI reading back under 70, as that will trigger an intermediate-term buy signal.

As mentioned earlier, NASDAQ volume was unusually heavy Wednesday, hitting its highest level of the year and closing over its upper bollinger band. Coming on a day when the NDX posted a higher high, low and close, that has longer-term bullish connotations. While such heavy volume on an up day can precede short-term weakness, buyers typically maintain the upper hand and drive the NDX higher over the following month. The last 30 instances in which the NDX posted a higher high, low and close and NASDAQ volume closed over its upper bollinger band are listed below…

NDX Rally Day and NASDAQ Volume > Upper Band
04/14/10… NDX ??? one month later
03/02/10… NDX +6.3% one month later
12/18/09… NDX +3.4% one month later
06/26/09… NDX +8.1% one month later
06/19/09… NDX +5.0% one month later
04/02/09… NDX +7.9% one month later
03/18/09… NDX +12.1% one month later
09/19/08… NDX -24.8% one month later
09/21/07… NDX +4.0% one month later
09/19/07… NDX +6.8% one month later
08/08/07… NDX +0.6% one month later
04/25/07… NDX +1.2% one month later
10/26/06… NDX +4.1% one month later
09/15/06… NDX +5.8% one month later
11/03/05… NDX +5.5% one month later
09/16/05… NDX -3.5% one month later
06/17/05… NDX +2.1% one month later
11/17/04… NDX +2.3% one month later
09/13/04… NDX +0.7% one month later
06/04/03… NDX +1.7% one month later
05/29/03… NDX +2.8% one month later
05/06/03… NDX +6.2% one month later
04/23/03… NDX +0.1% one month later
03/13/03… NDX +0.3% one month later
11/21/02… NDX -9.4% one month later
11/04/02… NDX +4.0% one month later
06/28/02… NDX -7.7% one month later
05/14/02… NDX -14.0% one month later
05/08/02… NDX -9.7% one month later
03/04/02… NDX -5.6% one month later

In 23 out of the last 30 occurrences, or 77% of the time, the NDX closed higher one month later, significantly greater than the 57% random chance for a higher NDX twenty trading days later in the same time frame. To demonstrate the positive tendency of a high-volume rally over a longer time frame, pull up the equity curve of this signal going back to 1990. With the exception of 2000-2002 and the fall of ’08, high-volume rally days have consistently led to higher prices over the following month.

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

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