Tuesday, June 02, 2009

Two Consecutive Strong Days: What Next?

We've seen two consecutive days in which the S&P 500 Index (SPY) has shown strong gains, hitting the R3 upside target on each of those occasions. (Note: R1/R2/R3 and S1/S2/S3 are proprietary pivot-derived profit targets that are adjusted for market volatility; they are published prior to the market open each day via Twitter). What has happened historically following two days of such strength?

Before I deliver the punch line, let me emphasize that the market has indeed shown strength lately. Monday saw us take out the early May high in the advance-decline line specific to NYSE common stocks. We also saw 59% of S&P 500 issues close above their 200-day moving averages, a high for this bull move. Finally, we registered over 2300 65-day highs among NYSE, NASDAQ, and ASE stocks, well above the 2003 achieved on May 6th.

Going back to 2000, when we've had two consecutive days that have touched R3, the next three days in SPY have averaged a loss of -.23% (74 up, 82 down); the remainder of the sample has averaged a three-day loss of -.02% (1161 up, 1034 down). While that is not a huge bearish bias, it does tell us that it is not uncommon for two consecutive days of strength to see some profit taking over the next few days. Interestingly, there is no bearish bias for the next day of trade, which averages a loss of -.10% (85 up, 71 down).

In short, while we have signs of significant upside strength, some consolidation of this strength during the week would not be unusual. If the breakout from the May trading range is to be sustained, we need to stay above the early May highs of 93.22 in SPY from May 8th. In other words, any consolidation from here should be relatively modest if we are seeing the start of a fresh bull leg.


arthatek said...

Going over the 200DMA is I think the most significant message of yesterday. (I think the message is also "the world is not ending after all !")

A lot of slower investors are now interested and as you say, pullbacks will be met with buying. Actually I expect more strength today because the bulls want to do a victory lap in the + 200 DMA circle.

sandp said...

Thank you as always for the insight.
We should get some direction for the day after 9 AM housing report.

ADP on Wed, weekly claims on Thu and the big Jobs report on Friday will bring negative news.

I will be monitoring very closely if ES closes above 829.50 to 832 for the week. If it can, I would consider bullish for the intermediate term.

heywally said...

I'm not sure the 200 means that much in the context of this market though there certainly is plenty of upside momentum in force.

My best guess is that shorting an early pop today is the best move but I'm not sure I will do that. :)

I'm 10% invested in the market now.

OKL said...

Still got some sectorial non-confirmation; yet to break May rally highs- XLF XLI XLY IYT XLU.

I thought what really got the XLE running was the natty gas move last week.

For a break >200sma, i thought the volume was a little too meek, i think a retest is a little more probable than another runaway move this week and it'll be interesting to see how traders react if the retest happens.

arthatek said...

agreed, the volume is weak, some of the buying and end of day moves are very suspect. I continue to warily observe the wall of worry. worst thing is that in dollar-euro terms I'm losing value if I'm under-invested. that aspect (cash losing its crown) and the treasuries also falling (nowhere to hide) potentially pushes more international money into this market.

today has been as I expected. open a bit higher, consolidate. (but never commit yourself to that)