Overbought Volatility, Oversold RSI, Persistently Elevated Volume
By
Rennie on Sunday, May 9th, 2010 at 3:08 pm
Stocks remained under considerable pressure Friday as institutions adopted a ‘sell first, ask questions later’ mindset. Volume remained very heavy, with NYSE floor volume exceeding 2 billion shares and consolidated volume surpassing 9 billion for the second day in a row. TICKscore closed at -33, sending the Cumulative TICKscore line below its February low. Cumulative TICK closed at -28,000, keeping the 20-day moving average in a persistent downtrend. 68 stocks within the 100-stock OEX universe closed under their lower bollinger band Friday vs. 65 on Thursday, signaling no let up in downside momentum. The extreme readings suggest the market is putting in a momentum low, but that a price low will most likely follow at a later date (and at a lower price).
In addition to the OEX components chart, another chart coming to the End of Day Charting section (later today) is the net long/short position among commercials and large traders in the E-Mini S&P500 as found in the weekly commitments of traders reports. You may recall that large traders in the ES contract moved to a net short position at the end of March and they remain short as of this past week. This trend-following behavior of large traders in the electronic category is contrary to historical tendencies, making it one of few sets of stock index COT data worth monitoring. See this March 30th column for more background.
VXO climbed over 20% for the second day in a row Friday, a pattern that has historically led to a higher S&P three or five trading days later. Back-to-back days of 20%+ gains is virtually unheard of, only occurring twice in the last twenty years (once back in January, the other coinciding with the crash of 1987). However, a signal I’ve discussed previously involves instances in which the VXO gains 10% or more on consecutive sessions. This has occurred 27 times since inception of the VXO, 25 of which led to a higher OEX close three or five trading days later. This suggests good odds we’ll see the market recover from any further selling pressure early this week to close above last week’s settlement in the Wednesday – Friday time frame.
VXO +10% two consecutive days
05/07/10… OEX ???
01/22/10… OEX +0.6% three days later
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
Another indication that the market is approaching a short-term bottom can be found on the daily chart of the Nasdaq100 along with the 14-day RSI. Note that as of Friday’s close the RSI fell under 30, historically a level that coincides with short-term bottoming periods. RSI stands for ‘relative strength index’, which as some have noted is somewhat misleading given that the RSI does not compare the relative strength of two issues, but rather the internal strength of a single issue. The calculation is complex, but essentially it separates up and down days over a certain period of time and compares the average change when the market rallies against the average change when the market declines. The end result is a reading between 0 and 100. When it was introduced by Welles Wilder back in 1978, he recommended using a 14-day RSI, meaning the last fourteen sessions are used in the calculation, and that’s still the default in most technical analysis packages. Note from this longer-term chart of the Nasdaq 14-day RSI that it generally oscillates between 70 on the upside and 30 on the downside. When it drops under 30, as it did on Friday, it signals the Nasdaq is technically oversold and most likely near a short-term bottom. The last thirty instances in which the NDX 14-day RSI closed under 30 are listed below, followed by the date when the RSI closed back over 30 and the performance of the Nasdaq in this time frame. Note that in 27 out of 30 cases, or 90% of the time, the oversold condition led to a short-term bounce. A little more than half of the time the bounce occurred immediately, while in other cases it took upwards of a week or more before the RSI closed back over 30…
Nasdaq100 (NDX) 14-day RSI Closes Under 30
05/07/10… NDX ???
10/06/08… NDX +1.3% when RSI >30 (five sessions)
09/29/08… NDX +5.9% when RSI >30 (one session)
09/17/08… NDX +4.0% when RSI >30 (one session)
09/09/08… NDX +1.0% when RSI >30 (one session)
01/22/08… NDX +1.7% when RSI >30 (two sessions)
01/17/08… NDX +0.1% when RSI >30 (one session)
01/08/08… NDX +2.0% when RSI >30 (one session)
06/12/06… NDX +0.7% when RSI >30 (one session)
05/16/06… NDX -1.5% when RSI >30 (seven sessions)
04/15/05… NDX +0.1% when RSI >30 (one session)
01/24/05… NDX +0.7% when RSI >30 (one session)
08/06/04… NDX +0.3% when RSI >30 (one session)
07/02/02… NDX +3.3% when RSI >30 (one session)
05/03/02… NDX +7.7% when RSI >30 (three sessions)
04/29/02… NDX +2.4% when RSI >30 (one session)
09/17/01… NDX -0.3% when RSI >30 (twelve sessions)
09/06/01… NDX +0.3% when RSI >30 (two sessions)
04/03/01… NDX +8.6% when RSI >30 (two sessions)
03/12/01… NDX +6.5% when RSI >30 (one session)
02/28/01… NDX +3.1% when RSI >30 (one session)
10/11/00… NDX +5.7% when RSI >30 (two sessions)
04/14/00… NDX +10.0% when RSI >30 (one session)
08/31/98… NDX +6.6% when RSI >30 (one session)
10/27/97… NDX +7.0% when RSI >30 (one session)
07/15/96… NDX +4.0% when RSI >30 (two sessions)
06/24/94… NDX +2.7% when RSI >30 (one session)
04/13/94… NDX -0.1% when RSI >30 (six sessions)
03/29/94… NDX +1.7% when RSI >30 (four sessions)
02/22/93… NDX +2.9% when RSI >30 (two sessions)
02/16/93… NDX +0.4% when RSI >30 (two sessions)
06/17/92… NDX +1.2% when RSI >30 (two sessions)
04/02/92… NDX +2.2% when RSI >30 (two sessions)
06/24/91… NDX +0.6% when RSI >30 (two sessions)
10/11/90… NDX +0.9% when RSI >30 (one session)
The one troubling aspect to Thursday and Friday’s action was the elevated volume as the market traded lower. While volume may have contracted slightly on Friday, it was still very heavy compared with recent history. In fact Friday marked only the eleventh time in the last forty years that NYSE volume exceeded its upper bollinger band on two consecutive down days for the S&P. This bearish pattern occurred just prior to the ’87 crash, and in general the market has consistently had a tough time moving higher over the short-term after a pair of high-volume down days. While most indications are pointing higher, let’s see if the market doesn’t offer a better buying opportunity at lower prices early this week…
S&P Down, NYSE Volume Over Upper Band Two Days
05/07/10… S&P500 ???
03/11/04… S&P500 -0.2% two sessions later
06/07/02… S&P500 -1.4% two sessions later
09/06/01… S&P500 -1.3% two sessions later
04/15/99… S&P500 -2.5% two sessions later
08/03/90… S&P500 -2.9% two sessions later
10/16/87… S&P500 -16.3% two sessions later
09/12/86… S&P500 +0.5% two sessions later
03/04/82… S&P500 -2.3% two sessions later
10/10/79… S&P500 -0.8% two sessions later
11/15/73… S&P500 -1.7% two sessions later
SPY volume also came in over its upper bollinger band on both Thursday and Friday, another indication of unusually heavy institutional participation. Regardless of whether the SPY closed higher or lower on the days of elevated volume, the market typically turns choppy over the short-term, often posting a lower close within the next week. Since 1996, the first year when average SPY volume topped a million shares, there have been 28 separate instances in which daily SPY volume exceeded its upper bollinger band two consecutive sessions, all of which are noted in the table below…
SPY Volume Over Upper Bollinger Band Two Days in a Row
05/07/10… ???
01/21/10… Lower SPY close one session later
10/01/09… Lower SPY close one session later
09/16/08… Lower SPY close one session later
09/09/08… Lower SPY close four sessions later
07/11/08… Lower SPY close one session later
03/14/08… Lower SPY close one session later
07/27/07… Lower SPY close five sessions later
07/19/06… Lower SPY close one session later
01/19/06… Lower SPY close one session later
10/06/05… Lower SPY close two sessions later
07/01/04… Lower SPY close one session later
03/11/04… Lower SPY close six sessions later
10/01/03… No lower SPY close within six sessions
01/24/03… Lower SPY close one session later
07/11/02… Lower SPY close one session later
01/30/02… Lower SPY close three sessions later
02/23/01… Lower SPY close three sessions later
09/25/00… Lower SPY close one session later
04/14/99… Lower SPY close one session later
08/28/98… Lower SPY close one session later
07/23/98… Lower SPY close one session later
04/27/98… Lower SPY close one session later
03/06/98… Lower SPY close one session later
01/12/98… No lower SPY close within six sessions
10/28/97… Lower SPY close one session later
06/24/97… Lower SPY close one session later
09/03/96… Lower SPY close two sessions later
07/16/96… Lower SPY close five sessions later
Note that in only three cases out of 28 did the SPY not post a subsequently lower close within the next week. While that’s not a statistically significant edge given the 72% random chance for a lower S&P close within the next week, in conjunction with the elevated NYSE volume there’s reason to be cautious. A lower close on Monday with signs of waning downside momentum would most likely set up a good buying opportunity for Tuesday’s session.
Tomorrow, a look at the longer-term implications of last week’s selloff.
Overbought Volatility, Oversold RSI, Persistently Elevated Volume
By Rennie on Sunday, May 9th, 2010 at 3:08 pmStocks remained under considerable pressure Friday as institutions adopted a ‘sell first, ask questions later’ mindset. Volume remained very heavy, with NYSE floor volume exceeding 2 billion shares and consolidated volume surpassing 9 billion for the second day in a row. TICKscore closed at -33, sending the Cumulative TICKscore line below its February low. Cumulative TICK closed at -28,000, keeping the 20-day moving average in a persistent downtrend. 68 stocks within the 100-stock OEX universe closed under their lower bollinger band Friday vs. 65 on Thursday, signaling no let up in downside momentum. The extreme readings suggest the market is putting in a momentum low, but that a price low will most likely follow at a later date (and at a lower price).
In addition to the OEX components chart, another chart coming to the End of Day Charting section (later today) is the net long/short position among commercials and large traders in the E-Mini S&P500 as found in the weekly commitments of traders reports. You may recall that large traders in the ES contract moved to a net short position at the end of March and they remain short as of this past week. This trend-following behavior of large traders in the electronic category is contrary to historical tendencies, making it one of few sets of stock index COT data worth monitoring. See this March 30th column for more background.
VXO climbed over 20% for the second day in a row Friday, a pattern that has historically led to a higher S&P three or five trading days later. Back-to-back days of 20%+ gains is virtually unheard of, only occurring twice in the last twenty years (once back in January, the other coinciding with the crash of 1987). However, a signal I’ve discussed previously involves instances in which the VXO gains 10% or more on consecutive sessions. This has occurred 27 times since inception of the VXO, 25 of which led to a higher OEX close three or five trading days later. This suggests good odds we’ll see the market recover from any further selling pressure early this week to close above last week’s settlement in the Wednesday – Friday time frame.
VXO +10% two consecutive days
05/07/10… OEX ???
01/22/10… OEX +0.6% three days later
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
Another indication that the market is approaching a short-term bottom can be found on the daily chart of the Nasdaq100 along with the 14-day RSI. Note that as of Friday’s close the RSI fell under 30, historically a level that coincides with short-term bottoming periods. RSI stands for ‘relative strength index’, which as some have noted is somewhat misleading given that the RSI does not compare the relative strength of two issues, but rather the internal strength of a single issue. The calculation is complex, but essentially it separates up and down days over a certain period of time and compares the average change when the market rallies against the average change when the market declines. The end result is a reading between 0 and 100. When it was introduced by Welles Wilder back in 1978, he recommended using a 14-day RSI, meaning the last fourteen sessions are used in the calculation, and that’s still the default in most technical analysis packages. Note from this longer-term chart of the Nasdaq 14-day RSI that it generally oscillates between 70 on the upside and 30 on the downside. When it drops under 30, as it did on Friday, it signals the Nasdaq is technically oversold and most likely near a short-term bottom. The last thirty instances in which the NDX 14-day RSI closed under 30 are listed below, followed by the date when the RSI closed back over 30 and the performance of the Nasdaq in this time frame. Note that in 27 out of 30 cases, or 90% of the time, the oversold condition led to a short-term bounce. A little more than half of the time the bounce occurred immediately, while in other cases it took upwards of a week or more before the RSI closed back over 30…
Nasdaq100 (NDX) 14-day RSI Closes Under 30
05/07/10… NDX ???
10/06/08… NDX +1.3% when RSI >30 (five sessions)
09/29/08… NDX +5.9% when RSI >30 (one session)
09/17/08… NDX +4.0% when RSI >30 (one session)
09/09/08… NDX +1.0% when RSI >30 (one session)
01/22/08… NDX +1.7% when RSI >30 (two sessions)
01/17/08… NDX +0.1% when RSI >30 (one session)
01/08/08… NDX +2.0% when RSI >30 (one session)
06/12/06… NDX +0.7% when RSI >30 (one session)
05/16/06… NDX -1.5% when RSI >30 (seven sessions)
04/15/05… NDX +0.1% when RSI >30 (one session)
01/24/05… NDX +0.7% when RSI >30 (one session)
08/06/04… NDX +0.3% when RSI >30 (one session)
07/02/02… NDX +3.3% when RSI >30 (one session)
05/03/02… NDX +7.7% when RSI >30 (three sessions)
04/29/02… NDX +2.4% when RSI >30 (one session)
09/17/01… NDX -0.3% when RSI >30 (twelve sessions)
09/06/01… NDX +0.3% when RSI >30 (two sessions)
04/03/01… NDX +8.6% when RSI >30 (two sessions)
03/12/01… NDX +6.5% when RSI >30 (one session)
02/28/01… NDX +3.1% when RSI >30 (one session)
10/11/00… NDX +5.7% when RSI >30 (two sessions)
04/14/00… NDX +10.0% when RSI >30 (one session)
08/31/98… NDX +6.6% when RSI >30 (one session)
10/27/97… NDX +7.0% when RSI >30 (one session)
07/15/96… NDX +4.0% when RSI >30 (two sessions)
06/24/94… NDX +2.7% when RSI >30 (one session)
04/13/94… NDX -0.1% when RSI >30 (six sessions)
03/29/94… NDX +1.7% when RSI >30 (four sessions)
02/22/93… NDX +2.9% when RSI >30 (two sessions)
02/16/93… NDX +0.4% when RSI >30 (two sessions)
06/17/92… NDX +1.2% when RSI >30 (two sessions)
04/02/92… NDX +2.2% when RSI >30 (two sessions)
06/24/91… NDX +0.6% when RSI >30 (two sessions)
10/11/90… NDX +0.9% when RSI >30 (one session)
The one troubling aspect to Thursday and Friday’s action was the elevated volume as the market traded lower. While volume may have contracted slightly on Friday, it was still very heavy compared with recent history. In fact Friday marked only the eleventh time in the last forty years that NYSE volume exceeded its upper bollinger band on two consecutive down days for the S&P. This bearish pattern occurred just prior to the ’87 crash, and in general the market has consistently had a tough time moving higher over the short-term after a pair of high-volume down days. While most indications are pointing higher, let’s see if the market doesn’t offer a better buying opportunity at lower prices early this week…
S&P Down, NYSE Volume Over Upper Band Two Days
05/07/10… S&P500 ???
03/11/04… S&P500 -0.2% two sessions later
06/07/02… S&P500 -1.4% two sessions later
09/06/01… S&P500 -1.3% two sessions later
04/15/99… S&P500 -2.5% two sessions later
08/03/90… S&P500 -2.9% two sessions later
10/16/87… S&P500 -16.3% two sessions later
09/12/86… S&P500 +0.5% two sessions later
03/04/82… S&P500 -2.3% two sessions later
10/10/79… S&P500 -0.8% two sessions later
11/15/73… S&P500 -1.7% two sessions later
SPY volume also came in over its upper bollinger band on both Thursday and Friday, another indication of unusually heavy institutional participation. Regardless of whether the SPY closed higher or lower on the days of elevated volume, the market typically turns choppy over the short-term, often posting a lower close within the next week. Since 1996, the first year when average SPY volume topped a million shares, there have been 28 separate instances in which daily SPY volume exceeded its upper bollinger band two consecutive sessions, all of which are noted in the table below…
SPY Volume Over Upper Bollinger Band Two Days in a Row
05/07/10… ???
01/21/10… Lower SPY close one session later
10/01/09… Lower SPY close one session later
09/16/08… Lower SPY close one session later
09/09/08… Lower SPY close four sessions later
07/11/08… Lower SPY close one session later
03/14/08… Lower SPY close one session later
07/27/07… Lower SPY close five sessions later
07/19/06… Lower SPY close one session later
01/19/06… Lower SPY close one session later
10/06/05… Lower SPY close two sessions later
07/01/04… Lower SPY close one session later
03/11/04… Lower SPY close six sessions later
10/01/03… No lower SPY close within six sessions
01/24/03… Lower SPY close one session later
07/11/02… Lower SPY close one session later
01/30/02… Lower SPY close three sessions later
02/23/01… Lower SPY close three sessions later
09/25/00… Lower SPY close one session later
04/14/99… Lower SPY close one session later
08/28/98… Lower SPY close one session later
07/23/98… Lower SPY close one session later
04/27/98… Lower SPY close one session later
03/06/98… Lower SPY close one session later
01/12/98… No lower SPY close within six sessions
10/28/97… Lower SPY close one session later
06/24/97… Lower SPY close one session later
09/03/96… Lower SPY close two sessions later
07/16/96… Lower SPY close five sessions later
Note that in only three cases out of 28 did the SPY not post a subsequently lower close within the next week. While that’s not a statistically significant edge given the 72% random chance for a lower S&P close within the next week, in conjunction with the elevated NYSE volume there’s reason to be cautious. A lower close on Monday with signs of waning downside momentum would most likely set up a good buying opportunity for Tuesday’s session.
Tomorrow, a look at the longer-term implications of last week’s selloff.