Intraday momentum points in surprising direction

●S&P 500 (SPX) dropped to a new low, and repeatedly swung between intraday range extremes

●The closing price location has often been a contrary indicator in the past

A hallmark of the market’s recent behavior is that stocks have often had a hard time holding on to intraday gains. Last week was a perfect example, as the S&P 500 (SPX) was up 1% or more on both Tuesday and Wednesday but reversed to close lower on both days.

Yesterday was a role reversal, though—at least until around noon ET. After initially dropping -1.25% intraday (on the heels of Friday’s -1.95% selloff, no less) and falling to its lowest level since April 2, the SPX switched tracks and rallied to the top of its daily range:

S&P 500 (SPX), 11/28/18–12/17/18. S&P 500 (SPX) price chart. Momentum reversal.

Source: Power E*TRADE

What did that move mean? First, a refresher on what preceded yesterday’s action:

●The SPX made a three-day downswing that, as of Friday, had dropped the index to its lowest close since the beginning of April.

●Friday was also a larger-than-average down day, and closed near the day’s low.

Given the market’s recently anxious tone, it probably didn’t surprise many traders that the SPX kicked off this week to the downside.

But that intraday upside reversal appeared to represent a sentiment shift, since at least some buyers had decided—if only at that moment—the market was “oversold” and represented a potential buying opportunity.

Two important points: First it can’t be ruled out that some of the buying may have been short sellers covering existing positions, which would be a less bullish situation than new buyers getting into the market. Second, even if the intraday rally did mostly consist of traders putting on new long trades, there was no guarantee said buyers wouldn’t decide they were wrong a few minutes, hours, or days later.

Which is exactly what happened, by the way. By 2 p.m. ET, the SPX was back in the bottom third of its range instead of the top third, and was down more than 1.5%.

Given such uncertainties, it can be a good idea to look at similar past days and find out what the market has done after them. With yesterday’s close still two hours away at the time of this analysis (it sure looked like it would be a down day, but you never know), we used two different definitions of the day’s price action to identify all the other days with the same basic characteristic—a sharply lower intraday move:

1. The day’s low must be below the lowest low of the previous 20 trading days.

2. The day’s low must be at least 1% lower than the previous day’s low.

We’ll combine these rules with two possibilities for the closing price:

3. The day closes in the upper third of the day’s range

4. The day closes in the bottom third of the day’s range

Notice this doesn’t require the SPX to close up on the day. All we’re really concerned about is whether the intraday momentum indicates bullishness (upper portion of range) or bearishness (bottom portion of range).

S&P 500 (SPX) after 1% intraday drops. Price pattern analysis results. Lower close appears more bullish than higher close.

Source: Power E*TRADE

Over the past 50 years There have been 95 days that closed in the top third of the range, and 298 that closed in the bottom third. The chart above compares each group’s median percentage daily gain or loss over the next five days.

The unexpected takeaway: Overall, if the SPX closed in the lower third of its range on the day it dropped 1% or more, its gains were larger over the next five days, except day 4. (By the way, if the close was in the middle third of the day’s range, the results over the next five days were, basically, in the middle of those shown above.)

Whether the next several days pan out according to this analysis remains to be seen. When the market doesn’t have an obvious long-term trend, simple price patterns can sometimes provide short-term momentum signals—but you need to know what they really signal, not what they appear to signal.

Market Mover Update: Yesterday marked the S&P 500’s (SPX) lowest closing price since October 2017. Crude oil closed below $50/barrel for the first time in more than a year.

Today’s numbers (all times ET): Housing Starts 8:30 (a.m.), FOMC meeting begins.

Today’s earnings include: Carnival (CCL), Darden Restaurants (DRI), FedEx (FDX), Jabil (JBL), Micron (MU).


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