2009 Ends with Range Contraction
by Jerome "Mel" Hickerson, MarketsPath.com
Well, that was certainly an interesting finish to an interesting year.
The year-ending session began with flat futures, the indices opened and popped briefly into positive territory, then moved downward until about 11:20. From there, the market went into a stall pattern until the final 25 minutes. In the final 25 minutes, buyers disappeared and the indices plunged with the SPX rapidly giving up seven points.
With the bond markets closing early to begin the holiday, a seven point market move is unusual. Bears celebrated the move as well they should. At the risk of sounding bullish (which I am not), I pointed out yesterday that 59 years of data since 1950 do not seem to attach a lot of significance to a year-end sell-off. I'll once again take the risk by pointing out some volume data; you can determine for yourself what this might signify, if anything.
Volume for the session was the lowest volume for a full session during the entire year. But let's drill down and look at the volume during the final 30 minutes when the action was most interesting. From 3:30 through 3:45 the volume was almost exactly the same as Monday's volume during the same 15 minute period and exceeded Tuesday's and Wednesday's abysmal volume only slightly.
When the action was heaviest, volume for the final 15 minutes exceeded Tuesday's and Wednesday's slightly, fell short of Monday's final period of volume, and to put it into perspective, was 40% of the average final 15 minute volume for the first half of December (and December's volume was low). While the index seemed to waterfall, there was no cascade of volume. The volume numbers seem to suggest that the late day sell-off was more of a buyer's strike than a rush of sellers looking for the exit.
I certainly missed seeing the late drop off coming. This happens when you prognosticate rather than pontificate after the facts are known. Mea culpa. Or as I hear from my teenagers, my bad.
The year is now behind us; indeed, the first decade of the new century is now in the history books. The year will be remembered mostly for the powerful rally of the last 10 months. The rally means a lot to the swing traders but to day traders, the rally is interesting to watch and discuss but our money wasn't made there. If you day trade the indices, your opportunities are more focused on the daily trading range and the last few months have been notable for the lack of easy trades. So once again, let's examine the 2009 numbers and see if we can glean anything that might help us going forward.
From a day trader's point of view, the most notable characteristic of 2009 has been the declining intraday trading range. Since July, the largest part of all daily moves has been the futures inspired morning gaps. Let's examine the data for 2009. First, let's define a 100 point Dow move as the close minus the gap. So a close of +80 and an opening gap of -20 would qualify as a 100 point day while a +200 close with an opening gap of +120 would not qualify.
If you examine the attached charts, you'll see that by this definition almost 42% of all 2009 100 point days occurred in the first quarter of the year and less than 15% in the last quarter. Only 3% of the year's total came in each November and December while each of the first three months had between 12% and 15% of the year's total. To really put this into perspective, consider how very negative the market was in January and February. The Dow lost more than 1700 points during those two months. Now here's the mind-blowing part: There were more 100 point UP days in January and February than during the last four and a half months of the year while the Dow was jumping more than 1200 points.
I have commented several times regarding the declining daily range. But let's pull back the covers a bit and see if we can gather anything useful from the observation. First, reviewing 2009 we can see that the daily range has dropped from 3.3% per day early in the year to under 1% per day late in the year. We've noted how this shrinking range affects day traders, but this type of range contraction also has significance to swing traders. And this is where the bulls will accuse me of being too bearish (I like getting it from both sides because it tells me that I am successful in delivering the facts -- which are clearly convoluted and should make both bears and bulls a little wary.)
Reviewing historical data so we give some perspective to the 2009 trend, we see that the average daily range since 1962 (as far back as my range data goes) is 1.48%. The average for 2009 was 2.0%, average for 2008 was 2.74%, and the average for 2007 was 1.17%.
December's range fell below 1%. This happens infrequently; the last time it happened was October, 2007. I am often surprised at how frequently that October 2007 date surfaces when I compare current statistics to historical data. That date is the historical top of the market, of course. Daily range always contracts at the top and expands on the way down. Volatility is a part of the bottoming process, not part of the topping process. Volatility comes after a market top; range contraction occurs before and during the topping process. Past data strongly indicates that the sub-1% daily range is suggesting at least a near-term top is arriving. The market does not trade within such a small intraday range for long and increasing volatility almost always arrives in the form of a downward move. If you are a swing trader, the range contraction should be an early warning sign.
One final item for today. There are several recent bar patterns identical to today:
09/23
10/21
12/03
Large range bars followed each time. The SPX closed higher the next day twice but all three times the SPX closed lower a couple days later. (See attached chart.)
For Monday, our model is strongly suggesting a bounce. We have once again triggered the "Tuesday's close should be higher than Monday's open" signal. This signal, which failed on Wednesday/Thursday, rarely fails twice consecutively. A double failure would be powerful evidence of a weakening market.
Mel’s Random Hits:
• Total tick for the day was +9,000. The entire day was weak, back and forth, until the closing 30 minutes. Obviously, that last half hour was bearish.
• The day's range was 12.83 points. This was the 5th largest range of December but would have been the smallest trading range of the year through May 5th.
• The day's volume was 37.3% of the average 2009 daily volume. The volume was 50% of the last 10 day (shrinking) average. The year ended with the smallest volume of 2009.
• 1% of the SPX stocks closed with two day RSI above 90. 4% closed with RSI above 80. 57% closed with RSI below 20 and 35% closed with RSI below 10. Quite the change in these numbers.
• 13% of the SPX are above their five day moving average, 39% are above their 10 day average, and 67% are above their 20 day moving average. Many traders sell or reduce positions when a stock moves below the 10 day average -- and 30% of the SPX did that on Thursday.
• 53% of the SPX stocks closed below their most recent previous lows.
• 5% of the SPX closed above their most recent previous high.
• 4.0% of stocks closed in the top half of the day's range. (96.0% closed in bottom half.)
• 85.2% of stocks closed in the bottom 20% of the day's range.
• 0.2% of stocks closed in the top 10% of the day's range.
• 10.8% of stocks closed within 2% of their 52 week high.
• 24.6% of stocks closed within 50% of their 52 week low.
• 0.8% of stocks closed within ¼% of their high for the day.
• 78.2% of stocks closed within ¼% of their low for the day.
• 5.6% of the SPX closed up from the previous close; 5.6% closed higher than the open.
• Sectors weaker than the SPX for the day: Basic Materials, Industrials, and Health Care
• Sectors stronger than the SPX for the day: Energy, Utilities, Technology, Financials, Consumer Staples, and Consumer Discretionary
• The $SOX index strength was stronger than the SPX again.
• The 2 Day RSI of the SPX is 6. The Dow RSI is 8, NASDAQ is 14 and Russell 8.
• SPX components moved upward slightly during the after hours.
Enjoy the rest of the weekend!
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"Mel"
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