After a disappointing Monday, bulls got a good scare on Tuesday’s open as the S&P 500 marginally cracked the February lows. However, buyers stepped up in force and bid the index higher for the rest of the day. Buyers have now stepped up in force for the last two up days. With this oversold period hitting a rare fifth consecutive day (T2108, the percentage of stocks trading above their 40-day moving averages [DMAs], remains below the 20% oversold threshold as it dipped to 11%), it feels like the stock market’s rubber band is finally ready to snap back for a “real” relief rally. (For the more skeptical technical outlook see Trader Mike’s summary of the action. Also note that news and event risk remain high, and my longer-term view remains bearish). I use the SPDRs S&P 500 Trust Series ETF (SPY) to show Tuesday’s action because my chart of the S&P 500 uses an incorrect opening price.
The continued decline of the VIX from recent highs further supports the case for a strong relief rally. It tumbled 10% on Tuesday further confirming the bearish engulfing topping pattern I pointed out earlier.
*All charts created using TeleChart:
After Friday’s reversal, I built a list of candidate stocks for playing a near-term bounce. The stocks that closed above their 50DMAs (“Tier 1”) continue to out-perform overall. Only one stock from this tier has fallen below the 50DMA since Friday. Today’s statistics display even more interesting characteristics than the one-day review. The table below shows that the Tier 1 stocks have the most skew, with a few stocks, like Sprint Nextel Corp (S), soaring since Friday’s reversal. Also note how the the correlation between the 1-day performance and the 2-day performance is very high for Tier 1, meaning that the 2-day performance of almost every Tier 1 stock could be predicted from its 1-day performance. This correlation declines rapidly for each lower Tier. (Note that in the last post, I mistakenly referred to the median as the mean. I also attributed 15 stocks to Tier 2 when there are actually 14).
As a reminder, here are the tiers:
- Tier 1: closed above the 50DMA and the 200DMA and never crossed the 200DMA (41 stocks)
- Tier 2: successfully tested the 200DMA support. Thursday’s selling did not break the 200DMA whereas Friday’s action took the open or the low of the day below the 200DMA. (14 stocks)
- Tier 3: closed on Thursday below the 200DMA and closed above it on Friday. (40 stocks)
- Tier 4: traded above the 200DMA but never crossed the 50DMA which remains overhead (104 stocks)
- Tier 5: traded below both the 50 and the 200DMA (129 stocks)
| Tuesday, May 25, 2010 | Correlations from… | |||||
| Tier | Avg Next Day Change |
Median Change |
Avg 2-Day Change |
Median 2-Day Change |
range to 2-day change | 1-day to 2-day change |
| 1 | 0.3% | -0.2% | -0.3% | -0.8% | -0.09 | 0.84 |
| 2 | 0.1% | -0.1% | -1.8% | -2.1% | -0.19 | 0.70 |
| 3 | 0.1% | 0.1% | -1.6% | -1.8% | 0.18 | 0.68 |
| 4 | 0.4% | 0.4% | -1.0% | -1.2% | 0.02 | 0.56 |
| 5 | -0.2% | -0.1% | -1.9% | -1.7% | -0.02 | 0.43 |
I will continue to track the performance of these stocks for each day of the oversold period and perhaps at future milestones, like the next overbought and/or oversold period for the S&P 500.
Be careful out there!
Full disclosure: long SSO calls