In a somewhat unusual move, while the SPX was closing at a 50-day high yesterday, the VIX actually closed higher. Below is a look at other times this has happened during the middle of the week.
These stats suggest a downside edge. Apparently the VIX should not be on the rise when the SPX is hitting new highs. The fact that it rose Wednesday implies a short-term pullback.
The last couple of days I’ve published some bullish studies that showed Nasdaq breadth data and VIX action were indicating further rises. The market followed up by meeting the objectives of these studies very quickly. Today I’ll mention what’s NOT so great about this rally – volume. On Friday NYSE volume came in low. While it rose some Monday, SPY volume faltered. It triggered a couple of bearish studies that were identified by the Quantifinder. I’ve linked to those studies below.
This first one looked at declining volume on a streak of higher closes.
https://quantifiableedges.blogspot.com/2009/09/spy-rising-while-spy-volume-declines.html
The second one looked at 20-day volume lows when the market is in the upper end of its range.
https://quantifiableedges.blogspot.com/2009/04/is-buying-drying-upagain.html
So while other indicators have been positive, volume is currently the squeaky wheel.
The VIX has moved from overbought to oversold quite quickly this past week (based on its stretch above and below the 10-day average). This brings up the question of whether the now “oversold” VIX is suggesting a selloff for the S&P. I took a look at similar past situations.
Results have been inconsistent but risk/reward has generally favored more upside over the coming weeks. This would seem to make sense since what you’re typically looking at in the SPX with the above setup is a strong rebound from a sharp decline during a long-term uptrend.
I am seeing some signs the market is nearing a pullback. The VIX action is not one of those signs.
While most everything did well on Thursday, much of the excitement was directed towards smallcaps and Nasdaq stocks. Below is a little study that shows how the market has performed in the past following such buying interest in the Nasdaq while the S&P 500 was in a long-term uptrend.
Instances are lower than I’d typically like to see, but with all 7 closing higher in the next day or 2, this study appears worth noting. Extremely strong volume breadth going into riskier Nasdaq stocks has often led to some follow through when the market is in a long-term uptrend.
I am off this morning to go get a root canal, so no time for anything new. With the Fed announcement coming later today, you may want to review some of the old Fed Studies.
So I’ve been asked a few times, “what has been happening with the Capitulative Breadth Indicator (CBI)?” No I haven’t stopped tracking it. There just hasn’t been a significant reading since the March bottom. Below is a chart I post to the members section of the website every night.
As long-time readers may recall, I don’t normally view CBI readings below 5 as any kind of warning sign. It’s not until readings reach 10 or more that they become highly indicative of an upcoming oversold bounce. We haven’t seen a reading above 4 in almost 8 months now. Even the current selloff has only seen the number move up to 3. It also appears unlikely to move substantially higher in the very near term. While other breadth readings like the McClellan Oscillator have been reaching extreme levels, the CBI requires more intense selling among individual issues – not just a broad decline. I’ll discuss the CBI again when more significant readings arrive.
For those who would like to learn more about this inidicator, you may check out the CBI label on the right hand side of the page.
Many traders who are aware of the history of the ’87 crash may often think after a bad Friday, “Will this get substantially worse on Monday? Are we setting up for a crash like ’87?” It’s an interesting question. Was 1987 an anomaly or does a really bad Friday often carry through into the next week? Below I looked at all Fridays since 1960 that closed down at least 2.5%.
The “Average Trade” column on the far right is skewed thanks to the ’87 crash which saw the market drop 20% on Monday. It appears in the almost all of the cases that the market was set up for a bounce based on Friday’s action rather than a crash. Of course while the last week has been bad, the market does remains in a long-term uptrend. I decided to filter the above results again to examine the bad Friday’s that appeared in long-term uptrends.
Instances are low here, but for the short-term they really couldn’t be more bullish. Again they also suggest the bounce should basically come immediately.
The McClellan Oscillator uses advance/decline data to calculate the strength or weakness of a move from a breadth standpoint. The value will vary from provider to provider as there are often slight differences in advance/decline data. Worden Bros. is one data provider I use. Their measure of the McClellan Oscillator hit -381.49 on Wednesday. This is the lowest reading since they began tracking advance/decline data in 1986. (Others I look at are low but not quite all-time lows.) Below is a chart of the McClellan Oscillator over the entire data period.
One notable about this chart is that breadth readings have become more extreme over time. Whereas moves above 100 and below -100 were rare from ’86 – ’93, they are fairly ordinary today.
I’ve shown before how a deceleration in selling often suggests a bullish edge. A study from the Quantifinder last night illustrated this concept. It first appeared in the June 18, 2009 blog. I’ve updated the results below.
Most impressive about this one is the 100% consistency of the bounce. That’s an impressive feat with a sample size so ample.
Monday’s selloff saw the market close poorly and near its lows for the day. Below is a study that examines weak closes since the March bottom.
One notable study that appeared in the Quantifnder Friday evening looked at the fact that the QQQQ closed at a 5-day low for the 1st time in at least 10 days. I’ve updated those results below:
More of an oddity than a quantified edge this morning…
The last two days we’ve seen opposing reversals. Wednesday the market made a new high but closed down on the day. Thursday it hit a 7-day low before reversing to close up on the day. A reversal off a 7-day high followed by a reversal off a 7-day low would seem a bit unusual. I looked back to 1978 and found out just how unusual it was. Below is what I found.
It’d be dangerous to trade based off of just a sample set of 5, but I was still fairly amazed that there wasn’t a single instance of a profitable close within the next 4 days.
So what happens for SPX after last hour breakdowns that are especially large compared to the size of the average daily range? I took a look. The most substantial results came on the day following the late-day selloff. Here they are:
Last night’s Subscriber Letter contained more details and observations about this study. Click here for a free trial.
The International Traders Expo takes place at Mandalay Bay in Las Vegas on November 18-21, 2009.
I’m pleased to announce I’ll be speaking on Thursday, November 19th at 1:15pm. The topic of my presentation will be “Quantifiable Edges for Swing Trading”. I’ll be discussing some of my favorite edges and most interesting research.
Registration for the event is free, and you may do so by clicking here.
I hope to get the opportunity to meet many readers and subscribers at the Expo.
Price/volume the last 4 days has done the following. Thursday the SPX closed at a 50-day high on lower NYSE volume. Friday SPX closed lower and NYSE volume rose. Monday we got another 50-day closing high on lower NYSE volume. Tuesday another market drop with rising volume. That certainly sounds like a bearish price/volume pattern. I took a look.
Going back to 1970 I was only able to find two other instances with the same 4 day pattern where 50-day highs were being made. The 1st was 3/26/81 and it was followed by a decline of nearly a year and a half. The 2nd instance was 6/6/95 and that was followed by a 3-day consolidation and then a continuation of a massive bull market. Nothing to learn there.
But what if we look at the 4-day price/volume pattern on its own and not require new highs be made? Based on common knowledge it would still seem to be bearish. Below are stats going back to 1970:
It could be argued that the above results suggest bullish tendencies, especially over the 4-7 day period. I don’t see any evidence that suggests the current 4-day price/volume pattern is bearish.