Sunday, March 2, 2008

Technical Analysis

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My worries about the possibility of the down stock market, expressed in the previous Overbought - Oversold post was not without a reason. The big volume surge to the price move up on the S&P 500 in period from February 26 until February 27, 2008, clearly seen on the 60-day MVO (5,25,3), pushed the stock market lower.

The same as before, I would assume that the market would not go deep – I did not saw big volume surges in the same period on the DJI and NASDAQ 100 chart that would be similar to the S&P 500. Yet taking look at the 60-day S&P 500 chart (Nasdaq 100 and DJI chart looks similar) I may say the stock market sentiment is still very negative and we still may expect further slide or flat market. RSI is below 30, Stochastics is below 20, VIX (Volatility Index) is growing, SBV, MACD, Advance/Decline Volume and Issues Oscillators are in the declining trend – all of these indicate me that the stock market is in the Bear mood, yet it could be very close to the oversold stage. What is needed to become oversold is a high volume surge at the bottom. When I see the big negative MVO on the S&P 500 that could be similar to the one saw on February 7-8, 2008 then I may assume that the indexes are ready for up-move.

Keep in mind that I do not use the technical analysis based on the 60-day chart to analyze the mid-term trend. Yes, this timeframe could be considered big (covers 2 months period) and one bar on this chart equal one hour, yet, I consider that 60-day index technical analysis helps me predict trend for the next couple of sessions. The 60-day chart is still dynamic and the technical indicators may change its direction within a single session several. If you choose to use 60-day chart, then I may recommend monitoring them in real-time.

For a mid-term technical analysis I would consider analyzing higher timeframes where at least 1 bar = 1 day and which could be analyzed after the market closes. The examples of such timeframes could be 1.5- and 2-year chart.

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