Snapshot Notes - July 25, 2008


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FRIDAY, JULY 25, 2008

Range, Volume Contract As Traders Take A Breath

07/25/08 3:20 PM EST

As of:

SPX 1251

HELP ARCHIVE

It's been a slow-motion Friday, which is probably welcome to many traders after the past two weeks of violent swings.

Today's intraday range has been small, almost enough to qualify as an NR7 day. "NR7" is a popular method of identifying narrow-range days, meaning those sessions where the intraday high minus the intraday low is the tightest of any other day over the past 7 days.

Today doesn't quite qualify on the S&P 500, as it has had a larger range than last Friday by about a point. Regardless, it's often said that a range contraction coming after a big decline is often a positive thing, as it shows a lessening of selling pressure.

I have accurate intraday data on the S&P back to 1982, so taking it from there let's look for any time the index dropped 1% or more in a day, then carved out an NR7 day the following day.

Buying the close on the narrow-range day and holding for a couple of sessions resulted in 74% winning trades (42 out of 57) and an average return of +0.7%. The average maximum gain over the next two days was almost twice the average maximum loss.

That's pretty positive - it has a good-sized sample, good consistency and a good risk/reward ratio. The bad part is that its recent success has been limited. Since 2000, the winning percentage dropped to 54%, and the average return was nearly halved. So far this year, there have been four occurrences (02/15, 04/14, 05/22 and 06/23), and three of them were positive after a couple of days.

Stipulating whether the narrow-range day occurred on a Friday, or if it had a positive or negative close, didn't impact the results much at all when looking at the history since 1982, but since 2000 the results going forward were significantly more positive if the narrow-range day closed in negative territory (then it showed a 75% winning percentage as opposed to only 42% if the day closed in positive territory).

We could take anything away from this study, depending on whether we had a bullish or bearish preference. I don't like studies like that - I prefer to rely on the ones that are robust no matter if we make slight changes to the parameters or look-back period. I would generally consider a day like today to be positive, but some of that could simply be my long-side preference.

That preference has been formed due to the studies we've discussed since the panic session last Tuesday. We've seen several compelling studies suggesting higher intermediate-term prices, and I'm going with that unless we break last week's lows and hold under there, or if something else crops up to cancel out those positive suggestions.

We had some short-term negatives earlier this week, but yesterday took care of those, and our more-sensitive indicators were able to work back to oversold territory. Maybe that's enough to kick off another up leg as the S&P holds above potential support around 1250, but I prefer to see more than just one down day to erase the quick optimism that built up last week. Because of that, I'm not making any trades here for the short- or intermediate-term and I'll wait to see if we can get something closer to 1240 early next week.

Not Much Of A Short-term Edge Anymore

07/25/08 9:25 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Friday morning...We begin the day with a slight bump up in the pre-market futures, as the Durable Goods order came in better than expected and gave the S&P a 6-point boost. Commodities are mixed to slightly weak this morning, and foreign markets are mostly weak but recovering from their lows of the day.

Last Tuesday, we finally started to see things shift back to the long side in terms of risk/reward on both a short- and intermediate-term time frame as panic readings emerged for the first time since the May high. That was followed by another up day and a huge move in the Banking sector, then another big up day on extremely heavy volume, which helped to confirm the possibility of last Tuesday marking a multi-week (or better) low.

One thing we hadn't seen, and still haven't, is a day with extremely positive breadth, which has some negative short-term connotations as we went over on Wednesday. That was in addition to several other negatives we discussed, which came home to roost yesterday.

Most of the short-term stuff we discussed has already been worked out, and so we're left without much of an edge here, at least that I can find. Our most sensitive guides are beginning to enter oversold territory together for the first time in a couple of weeks, including the STEM.MR Model. The most-sensitive indicator, the Price Oscillator, closed yesterday at an extremely stretched 30%, a level that usually results in a very short-term halt to the selling pressure.

So we could, and probably should, see some kind of bounce after yesterday's drubbing, but I don't see the kind of sentiment condition or any other breadth- or price-based patterns giving a strong bias for a sustained move either way at this point. Given the multiple longer-term positives we've spent the last week discussing, my preference is to look for another good spot for long-side trades, which should occur with another day or so of at least moderate selling pressure.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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