Wednesday, January 16, 2008

Extremely weak breadth and a possible gap lower...

The IBD Follow Through Day study seems to be generating a lot of interest, and I promise I will get back to it shortly. The market looks to be setting up for some interesting trading tomorrow morning, though – so I thought I’d focus on more pressing issues.

NYSE down volume swamped up volume by over 9:1 today. That kind of breadth is somewhat unusual and can be a sign of panic. Lowry’s was the first group I’m aware of to do extensive study on “90% days” and they have some excellent material on them.

Intel disappointed after the close and has added fuel to the fire.. As I write this around midnight Dow futures are down 100 points, S&P 500 futures are down 12 points and Nasdaq futures are down a whopping 32 points. Asian markets are also taking it on the chin.

Let’s take a look at history to see how the next few days may be setting up. Going back to 1970, there were one hundred and thrity-two 90% downside days identified by my database. When viewing 90% down days in isolation, this is how the next week looked:

As you can see - by itself a 90% down volume day is not a clear sign of a washout. There is more downside to come more often than not.

The next table looks back to early 1993 – the inception of the SPY. Since then there have been thirty-six 90% down volume days on the NYSE. Of those 36, only 5 times has the SPY gapped lower the next morning by more than 0.25%. With a gap lower looking likely, I thought it might be worth taking a look at those occurrences:

The 90% downside day on its own won’t necessarily wash out the market, but when combined with gap down open it typically has served to mark at least a short-term panic low. Although the sample size for this study is smaller than I typically like, should the gap down occur, the consistent and sizable gains in the study above indicate that traders should be aware of a potentially large intraday reversal.

Rob Hanna


Rob Hanna said...

Should you wish to view the tables larger - just double click. Hopefully that will do the trick.

Rob Hanna

Dave M. said...

Rob, here's another factor you might want to use and run the IBD screen again. In "The Successful Investor", 2004, page 9, O'Neill says that "On the confirmation day, one key market index must be up a powerful and decisive amount, usually 1.7 percent or more, ON TRADING VOLUME THAT'S HIGHER THAN THE DAY BEFORE AND TYPICALLY BETTER THAN IT'S DAILY AVERAGE.

In this book, he repeats the 80% claim. Keep up the good work, Rob!

Dave M. said...

Rob, Lowry's 90% upside and downside indicators stopped working last year. In 2007, there were a bunch of these instances, both up and down, (and in pairs!) and the market indices have not reacted as they should have.

Anonymous said...

Hi very interesting blog. Keep it coming. Just small suggestion. When you start your study on some indicator please describe it a lite bit more or give some link. This detail will help to understand your posts a lot easier.


Anonymous said...

great work, and timely to boot!

Anonymous said...

Wanted to add, what happens in this specific case 5d out? 20d out? i.e., would this specific scenario represent an intermediate bottom, unlike the lone 9-1?

Thanks again!