Thursday, September 11, 2008

Rebound Breadth Is Weak

The first day of a bounce can sometimes be a good indication of whether that bounce is likely to succeed or roll over. I recently showed an example of how a weak bounce (price-wise) can suggest a downside edge. That study is in effect again tonight.

Breadth can also be important to watch. After seeing down volume account for about 90% of total NYSE volume during Tuesday’s selloff, today’s bounce higher only rebounded with about 56% up volume. I performed a study which looked at other times the market dropped at least 2% on over 85% down volume on day 1 and then rose on under 60% up volume on day 2.

The setup was fairly rare from 1970-2000, triggering 15 times in 31 years. There was no discernable edge over this period of time, either. From 2001 through today it has triggered 14 times and consistently predicted downside. Below are some statistics on those instances:

12 of 14 instances posted a close lower than the trigger price in the next 2 days. Within 3 days all 14 posted a lower close.

In the last 13 months the frequency of occurrences has picked up tremendously. Wednesday marked the 8th instance since August 2007. The previous 7 instances are listed below with a 6-day exit.

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