Friday, June 09, 2006

NASDAQ Is Up In Arms!

Note: I'll be on the road this coming week, but will be updating this site during that time. Next Weblog update scheduled for Friday, June 16th. Here is the Trading Markets article on combining historical analyses with intraday market patterns.

I notice that the NASDAQ 100 Index (QQQQ) is down over 3% over the last five trading sessions, with all five days showing an Arms Index (TRIN) over 1.0. This means we've had concentrated selling among NASDAQ 100 issues over that period.

Since 2004 (N = 608 trading sessions), we've had 18 occasions in which five consecutive days have had elevated Arms Index readings. QQQQ has been higher two days later by an average of .37% (11 up, 7 down). That is stronger than the average two-day gain of .03% (308 up, 300 down) for the entire sample.

When the five-day average of the Arms Index has been above 1.5 (N = 26), the next two days in QQQQ have averaged a gain of .42% (16 up, 10 down), again stronger than average for the sample.

Interestingly, when the five-day price change in QQQQ has been down 3% or more (N = 46), the results going forward have been subnormal. This is particularly the case when the five-day Arms Index has been elevated during a five-day drop of 3% or more. When the market has dropped 3% or more and the average Arms Index has been elevated (N = 23), the next three days in QQQQ average a loss of -.32% (8 up, 15 down). When the market has had a 3% or greater drop and the Arms Index has not been elevated (N = 23), the next three days in QQQQ have averaged a gain of .13% (11 up, 12 down).

The bottom line is that concentrated selling, as measured by the Arms Index (TRIN) over five days, is normally bullish in QQQQ. When it has been accompanied by a steep price drop over the past five days (as we've seen recently), however, the returns over the near term have not been favorable.

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