Tuesday, June 23, 2009

Pre-Opening Briefing: After a Weak Day


As noted in
the recent tweet, we had a strong downside momentum day on Monday, with Demand closing at 15 and Supply at 214. The general pattern following such downside momentum days is a bounce one day later followed by subsequent weakness, although this pattern is affected by larger-term market regimes.

Given the significant expansion in the number of stocks registering fresh 20-day lows, I went back to October, 2002 (when I first began archiving the 20-day high/low data) and examined what happens in the S&P 500 Index (SPY) after 20-day new lows make a 20-day new high. The next day, SPY averages a gain of .18% (91 occasions up, 59 down), versus no change for the rest of the sample (818 up, 712 down). Five days after a surge in 20-day lows, SPY averages a gain of .47% (88 up, 62 down), versus .02% for the remainder of the sample (836 up, 694 down).

It's thus not unusual to get a bounce following significant market weakness. I will be watching to see how we trade relative to yesterday's pivot level, as well as the usual sentiment gauges of NYSE TICK and volume transacted at bid/offer, to gauge the likelihood of sustaining a bounce on the day today. Alternatively, inability to sustain buying sentiment below the pivot would sustain the downtrend.

10:17 AM CT - I added the above chart of the NYSE TICK with a green 20-minute moving average to show how sentiment has weakened during the trading day, with more stocks transacting on downticks than upticks. Noticing that shift was key to anticipating the move below the overnight low. Should we continue with bearish sentiment, the next target would be S1. The fact that it's taken us a while to even approach S1 suggests to me, however, that we could see more of a range environment, trading back into the overnight range, in advance of the Fed announcement and Wednesday's numbers. I'm watching TICK closely to handicap that scenario (but not become wedded to it!)
.

2 comments:

manny said...

sorry but the 20 day new high you refer to is a high higher than the 20 days lows(all of them, so the stock should be higher than day one) or just higher than ysterdays close?

Brett Steenbarger, Ph.D. said...

Hi Manny,

Sorry for any confusion. The number of 20-day lows hit a 20-day peak on Monday. I was referring to the number of stocks making lows over a prior 20-day period; that was the highest number in the past 20 days.

Brett