Multiple Signals Set to Trigger Ahead of Labor Day Holiday

A number of signals set to trigger today. We’ll start off with the short-term negatives, then the positives…

On the negative side, when S&P futures have gained 0.5% on the last three days of a week, the first day of the following week has been down 74% of the time, averaging a loss of 0.7%. Here’s a look at every occurrence since 1990…

S&P Futures +0.5% Last Three Days of Week
07/09/10… S&P futures +0.4% next session
12/11/09… S&P futures +0.5% next session
08/21/09… S&P futures -0.1% next session
04/17/09… S&P futures -3.9% next session
04/03/09… S&P futures -1.2% next session
03/13/09… S&P futures -0.1% next session
01/02/09… S&P futures +0.2% next session
11/28/08… S&P futures -8.9%| next session
09/12/08… S&P futures -5.0% next session
07/18/08… S&P futures +0.1% next session
06/15/07… S&P futures -0.1% next session
05/26/06… S&P futures -1.8% next session
02/25/05… S&P futures -0.7% next session
11/05/04… S&P futures -0.1% next session
04/27/01… S&P futures -0.3% next session
03/24/00… S&P futures -1.1% next session
03/17/00… S&P futures -0.7% next session
12/03/99… S&P futures -0.9% next session
11/12/99… S&P futures +0.1% next session
11/05/99… S&P futures -0.1% next session
10/29/99… S&P futures -1.0% next session
07/02/99… S&P futures -0.2% next session
11/20/98… S&P futures +2.3% next session (*)
11/06/98… S&P futures -1.0% next session
05/01/98… S&P futures -0.2% next session
11/21/97… S&P futures -2.0% next session
10/03/97… S&P futures +0.6% next session
07/03/97… S&P futures -1.0% next session
08/02/96… S&P futures -0.7% next session
01/18/91… S&P futures -0.3% next session

Out of 30 occurrences since 1990, the S&P closed lower the next day 23 times, or 77% of the time. That’s a significant downside edge compared with the 47% random chance for a lower S&P close one day later in the same time frame. In only one case did the S&P gain over 0.6% the next day, while it fell over 0.6% fourteen times.

Also noteworthy that the VXO is set to finish more than 15% below its 10-day moving average (on a close below 21.38). That too is a short-term negative development and usually leads to a lower S&P close within the next two sessions (25 out of last 30 occurrences, or 83% of the time vs. 62% random odds)…

VXO 15% Below 10-day Moving Average
07/13/10… Lower S&P close one session later
07/08/10… No lower S&P close within two sessions
06/15/10… Lower S&P close one session later
06/02/10… Lower S&P close two sessions later
02/22/10… Lower S&P close one session later
02/19/10… Lower S&P close one session later
02/18/10… No lower S&P close within two sessions
01/28/09… Lower S&P close one session later
12/19/08… Lower S&P close one session later
12/22/08… Lower S&P close one session later
11/28/08… Lower S&P close one session later
11/26/08… Lower S&P close two sessions later
11/05/08… Lower S&P close one session later
11/04/08… Lower S&P close one session later
11/03/08… Lower S&P close two sessions later
10/21/08… Lower S&P close one session later
10/20/08… Lower S&P close one session later
07/22/08… Lower S&P close two sessions later
05/19/08… Lower S&P close one session later
12/26/07… Lower S&P close one session later
12/24/07… Lower S&P close two sessions later
12/21/07… No lower S&P close within two sessions
09/27/07… Lower S&P close one session later
09/26/07… No lower S&P close within three sessions
09/25/07… No lower S&P close within three sessions
09/24/07… Lower S&P close one session later
09/21/07… Lower S&P close one session later
09/20/07… Lower S&P close two sessions later
09/19/07… Lower S&P close one session later
09/18/07… Lower S&P close two sessions later

The two studies above suggest the potential for a down day to start the holiday-shortened week, but the fact that breadth is set to close better than 2:1 positive for a third consecutive session suggests  Tuesday losses will be recouped Wednesday. Of the last 30 times that NYSE breadth closed 2:1 positive three days in a row, the S&P was higher two sessions later 83% of the time, significantly above the 53% random chance for a higher S&P two days later in the same time frame…

Three Consecutive 2:1 Positive Breadth Sessions
07/26/10… SPX -0.8% two sessions later
07/09/10… SPX +1.6% two sessions later
02/18/10… SPX +0.1% two sessions later
09/16/09… SPX -0.0% two sessions later
09/08/09… SPX +1.8% two sessions later
07/15/09… SPX +0.8% two sessions later
04/02/09… SPX +0.1% two sessions later
01/02/09… SPX +0.3% two sessions later
11/26/08… SPX -8.1% two sessions later
03/21/07… SPX +0.1% two sessions later
02/01/07… SPX +0.1% two sessions later
07/03/06… SPX -0.5% two sessions later
09/02/03… SPX +0.6% two sessions later
12/26/91… SPX +2.5% two sessions later
02/06/91… SPX +0.4% two sessions later
08/13/86… SPX +0.6% two sessions later
08/03/84… SPX +0.2% two sessions later
05/06/83… SPX -0.1% two sessions later
03/03/83… SPX +0.1% two sessions later
10/08/82… SPX +2.6% two sessions later
08/18/82… SPX +4.1% two sessions later
11/13/80… SPX +0.9% two sessions later
04/24/80… SPX +1.2% two sessions later
01/04/79… SPX +0.2% two sessions later
06/14/76… SPX +0.1% two sessions later
01/05/76… SPX +1.5% two sessions later
06/23/75… SPX +1.1% two sessions later
01/03/75… SPX +0.4% two sessions later
10/11/74… SPX +0.4% two sessions later
09/21/73… SPX +0.8% two sessions later

Finally, from on an intermediate-term perspective it’s interesting to note that today is shaping up to be the second unfilled upside gap (low > previous day’s high) for S&P futures in just the last three sessions. When sellers can’t drive the market lower to fill a gap and then a second upside gap appears, it’s usually a sign that sellers are overwhelmed. While conditions can often turn choppy after the second gap, the market has a good track record of rebounding from short-term weakness and settling flat-to-higher one month later. The table below lists each of the last thirty instances in which two unfilled upside gaps formed within a one-month time frame, along with the performance of the S&P500 looking out twenty trading days. To qualify for inclusion, the first gap must remain unfilled when the second gap appears…

Two Unfilled Upside Gaps In a One-Month Time Frame
03/02/10 & 03/05/10… S&P500 +4.5% one month later
03/01/10 & 03/02/10… S&P500 +5.1% one month later
12/21/09 & 12/24/09… S&P500 -3.1% one month later (*)
12/10/09 & 12/14/09… S&P500 +3.0% one month later
11/09/09 & 11/16/09… S&P500 +0.2% one month later
10/08/09 & 10/14/09… S&P500 +0.8% one month later
10/06/09 & 10/08/09… S&P500 -0.1% one month later
07/30/09 & 08/21/09… S&P500 +3.8% one month later
07/15/09 & 07/30/09… S&P500 +4.5% one month later
04/02/09 & 04/09/09… S&P500 +8.5% one month later
11/24/08 & 12/08/08… S&P500 -0.3% one month later
04/16/08 & 04/18/08… S&P500 +2.5% one month later
03/18/08 & 03/24/08… S&P500 +2.8% one month later
12/21/07 & 12/24/07… S&P500 -10.2% one month later (*)
11/28/07 & 12/05/07… S&P500 -5.0% one month later (*)
04/16/07 & 04/20/07… S&P500 +2.3% one month later
04/03/07 & 04/16/07… S&P500 +2.3% one month later
06/15/06 & 06/29/06… S&P500 -0.1% one month later
10/31/05 & 11/17/05… S&P500 +1.7% one month later
05/18/05 & 05/26/05… S&P500 -0.6% one month later
10/01/04 & 10/04/04… S&P500 -0.4% one month later
11/24/03 & 12/01/03… S&P500 +3.8% one month later
03/13/03 & 04/02/03… S&P500 +4.3% one month later
10/15/02 & 10/17/02… S&P500 +2.7% one month later
10/11/02 & 10/15/02… S&P500 +0.2% one month later
11/13/01 & 12/05/01… S&P500 +0.5% one month later
11/05/01 & 11/13/01… S&P500 -0.3% one month later
09/24/01 & 09/28/01… S&P500 +5.6% one month later
04/10/01 & 04/18/01… S&P500 +3.4% one month later
10/28/99 & 10/29/99… S&P500 +2.5% one month later

In 21 out of the last 30 cases, or 70% of the time, the S&P500 was trading higher one month later. That’s not significantly better than the 56% random odds of a higher S&P one month later. But note that of the nine times the S&P failed to rally, it finished down 1%+ one month later only three times out of thirty (or 10% of the time). In the same period, the random chance for a drop of 1%+ over any twenty-day period was much higher at 32%. So when two unfilled upside gaps appear in a short period of time, we can infer downside potential is likely to be limited (<1%) over the coming month.

Categories : Archived Intraday Commentary, Intraday Commentary

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