Technical Analysis

I my last the "S&P 500" post I have summarized some facts that pointed to the oversold market. Yet, at the moment I wrote my outlook, the market was still weak to make strong statement about a possibility of the recovery, so, I made some comments based on the 60-day chart technical analysis about what I would like to see as a confirmation of the recovery.

On May 27, 2008 the stock market met my expectations - the SBV and advance decline issues oscillator started to move up, McClellan oscillator overcrossed zero line on  it's up move, RSI and Stochastics run above 30 and 20 respectively - the rest of the week the Nasdaq 100, S&P 5000 and DJI indexes spent in the recovery. By the end of the week the NASDAQ 100 recovered completely from the correction, while the S&P 500 and DJI are still far from the May 19 high.

By looking on the same set of the technical studies at the end of this week I may see some indication of the overbought market, yet, I would not state that the market is ready for another correction. Right now, I would say we have situation opposite to what we had last Saturday - we see some oversold levels, yet, many indicators on the charts are still bullish and we still may see further recovery (I refer to the 60-day index charts where one bar equal to one hour).

At the current moment MVO shows some oversold levels, we had high A/D levels we have RSI and Stochastics above 70 and 80. In the technical analysis, all of this indicates some degree of the oversold market in the analyzed timeframe,  yet, it does not mean that the stock market should drop now. It indicates that the market is ready for down turn, however, it's still shows the dominance of the bullish sentiment and a possibility of the further up move. In such situation I prefer set several conditions which may help me to make stronger conclusion about possible trend direction. As an example I may say that if I see the SBV decline on my index charts accompanied with advance/decline oscillator decline, if I see the RSI and Stochastics dropping below 70 and 30 respectively, if I see that the McClellan oscillator declines and crosses zero line then I may say that I see the confirmations of the sentiment changes and changes in the stock market trend.

I'll repeat myself - the technical analysis is not something that could be done once a month, the stock market is in the process of constant changes and technical indicators should be watched constantly.

S&P 500 Chart

As in response to may note in my last "Trading System" (on 5/18/2008) post that the market is overbought over the short term, on May 19, 2008 the stock market including the Nasdaq 100, DOW and S&P 500 indexes has dropped into correction. For me the cause of this drop is the high volume during the market up move in period from May 13 until May 16, 2008 (see high green MVO on the Nasdaq 100 and S&P 500 in that period). The question now is what are the odds of the developing this correction down into something bigger and what the technical analysis is telling about the possibility of the recovery.

Coming back to the 60-day chart I have stopped my choice on the S&P 500 chart. Basically, the technical indicators on the major three U.S. indices (DJI, Nasdaq 100 and S&P 500) look similar with the exception of the volume indicators at this point of time. I have selected the S&P 500 because it somewhat in the middle between the other two indices. While Nasdaq 100 shows the absence of the high volume during the price move down, as an opposite, the DJI index shows luck of the high volume during the price move up. From the volume analysis prospective the Nasdaq 100 still could be considered overbought while the DJI could be considered oversold over the short term. The S&P 500 in this prospective is in the middle by showing the high volume during the price rise as well as it shows the high volume during the price decline.

The same as volume indicators the other technical studies are mixed, by pointing to the oversold market (over short term) and possibility of a recovery, yet, they are still weak and I would look for more confirmation signals:

- The SBV is flat. Yes, it's big enough to indicate the oversold market, yet, it does not move up;

- The MVO on May 20-22, 2008 is actually a very good to indicate the possibility of a recovery, yet, it's not very impressive on the Nasdaq 100 index;

- The Advance Declines Issues Oscillator started to move down again. Even if it indicates high oversold levels on May 21st, I would not bet on a reversal until I see this oscillator moving up;

- MACD is moving up and this is positive for a possibility of a reversal;

- RSI and Stochastics are below 30 and 20 level respectively by indicating the oversold market, yet, it would be nice to see them above these levels moving up as confirmation of a coming recovery;

- The VIX (volatility index) is increasing by moving closer to 20 - not very nice;

- McClellan oscillator did advanced, yet, it started to move down again - I would prefer to see it crossing zero line on up move.

My view on the current market is that it should be watched very closely on the daily basis.....

Trading System

In the last "Technical Analysis" post I have mentioned that I’m not going to be surprised of early exit from the correction. Starting from Monday the stock market is moving up.

Again we saw that the strong overbought indicators were needed to push the market in the correction while weaker oversold indicators have reversed the market back into the up-trend. As I said in my previous posts - this is one of the characteristics of the general up-trend. So far, I have not seen even closely so strong overbought indicators that could be compared to the oversold indicators in January and March 2008. Yes, we may face corrections down, yet I believe there is still some time before the market release the energy collected during the recent market crash.

Yes, my mood is bullish in the long run. You may ask why it’s so important for those who play on the short trades to spend time on the longer-term technical analysis. The answer is simple – one of the trading strategies that could use long- and mid-term analysis in the short-term trading system is do not place a short term trade against general market trend. Many traders consider it as a golden rule – DO NOT PLAY AGAINST THE TREND. Some traders interpret this rule as a short-term trader does not have to play against the short-term trend, however, this is not my understanding.

In my understanding the example of the implementing this rule into the trading system could be:

1.  If a short-term trader is bullish in the longer-term trend then
   1. A traders uses any correction down to open a long position
   2. A  trader does not trade short no matter how strong overbought indicators are. He/she uses overbought technical indicators to close the long position but not to open a short trade
      
2.  The opposite for a trader in the bearish longer-term mood.

This is my understanding of "DO NOT PLAY AGAINST THE TREND", That is why I spend time to analyze the general market trend even if I do not use it to invest for a long-term…

Ok, no back to the market. Sorry, I do not post the chart today, yet I may say that my technical indicators tells me that again we may see some correction, yet, I would consider that it’s a little bit early to talk about it. Yes I may see the short-term indication of the overbought market, however the S&P 500 and the NASDAQ 100 indexes in the up move (DJI Index is exception – it stuck on the same level over the last 3 sessions) and as a rule very often we see some flat market before any serious correction. I would monitor closely the indicators over the next sessions to see if there is any indication on the correction…

Technical Analysis

I’m still bullish – see my previous "S&P 500" post - yet I think we are facing the correction within the stronger dominant up trend.

By coming back to the 60-day chart, I may say that my set of the technical indicators does not look very optimistic at this point of time. The only promising point is the negative MVO seen on the Dow Jones Industrial (DJI) on May 8, 2008. It tells me that on his day we had some abnormal volume during the index drop, which could lead to the reversal up move. However, the S&P 500 MVO on that day was much smaller and the absence of the negative MVO make me assume that we still could see some down side move. I would say the DJI is ready for up-move, yet, the Nasdaq 100 and S&P 500 still may push the market down.

On the other hand over the past couple of weeks we saw situations when the market moved up by ignoring oversold indicators and negative news. It's usual characteristic of the bullish market when the weak overbought (bullish) technical indicators and small positive news are pushing market up while much stronger oversold indicators and much stronger negative news are needed to push the market into down-side correction. So, I'm not going to be surprise if I see early exit from the correction.

On this week I have added McClellan oscillator to my chart. Technical analysis based on the McClellan oscillator helps me  better separate periods of the bullish and bearish mood on the stock market. Recently we saw advancing McClellan Oscillator and that tells that we may face the reversal - it's another positive sign. Yet, yesterday it stopped to advance and started to decline, by indicating that the correction is not over yet.

The main question for me would be to define the point or period when I may more or less safe state the odds are on the side of the up-trend. I would put several criterias which would help me define it:

1. I would like to see the advancing SBV
2. It would be nice to see bigger negative MVO in the NASDAQ 100 and S&P 500 sectors - it's not necessary condition. We did not see big negative MVO on March 11, 2008, only DJI has strong negative MVO on that day
3. Stochastics above 20 would confirm the up-trend resumption.
4. I would prefer to see the McClellan oscillator rising again.

As I already mentioned several times, this is my personal view on the stock market and it does not mean that my technical analysis is correct...

S&P 500

Today I would like to refer to 1-year S&P 500 chart. I have not been showing this chart for a long time – last time I have mentioned it on February 2, 2008 in my "S&P 500" report. I have mentioned 2-year S&P 500 chart in my "Technical Analysis" post on February 16, 2008. As you may see from these posts, time on time I refer to the big time-frame of the S&P 500 chart in order to evaluate longer term of the stock market trend. Those who read my posts may notice that over the last 3 months I have been somewhat aggressive about the recovery. I know that many of big and small traders were bearish that time (thanks to the media) and maybe skeptically looked at my bullish posts. I think there are still a lot of traders (those who follows news) who still believe in the global market crash based on the U.S. housing problem, high oil prices and fear of inflation. I may only say to them - "Good Luck, until you are bearish those who follow charts by ignoring CNN is making money…"

So today I coming back to 1-year chart to show the technical indicators that were screaming in all market sectors including DOW 30, NASDAQ 100 and S&P 500 starting from the middle of January and which did confirmed later that we are in bull market.

From this chart you may see the unbelievably huge volume surge in period from January 8 until January 25, 2008. As I have mentioned simultaneously before, it’s impossible for the stock market to go further down after such huge volume release. We should always remember (I’m repeating myself): the volume is two-side transaction – there are always a buyer and a seller. Some group of the investors was buying from those who sold in panic in that period, and those investors, who were able to buy such huge number of stock shares, dramatically reduced the number of panic traders. The same group of investors was buying in period from March 7 until March 24, 2008 and they are still buying… This is my GOLDER rule of the Stock Market Technical analysis "The big volume surge leads to the changes in the supply/demand balance" - the rest of analysis follow…

From the same chart I may see that there is still room for the market to go higher. We still have not seen any volume release to the price up move – I still do not see that those who were buying in January – March 2008 started to sell.

DJU Stocks

The Dow Jones Utility average index (DJU Index) was introduced in January 1929 as a basket of 18 stocks. DJU Index is one of the youngest indexes from three most popular DOW indexes - DJI and DJT indexes were lunched at the end of 19th century. On July 1, 1929, the number of DJU index components was increased to 20. On June 2, 1938 the DJU stocks number was reduced to 15 stocks, where it remains ever since.

Below you may see the list of the Dow Jones Utilities Stocks (DJU Stocks) as of May 2, 2008. This is an outdated listing, yet it may give you the picture of what companies are selected into DJU index. For most recent DJU listing I would recommend visiting the Dow Jones web site

Ticker	Company	Sector	Exchange
AEP	American Electric Power Co. Inc.	Electricity	NYSE
CNP	CenterPoint Energy Inc.	Multiutilities	NYSE
ED	Consolidated Edison Inc.	Electricity	NYSE
D	Dominion Resources Inc. (Virginia)	Electricity	NYSE
DUK	Duke Energy Corp.	Multiutilities	NYSE
EIX	Edison International	Electricity	NYSE
EXC	Exelon Corp.	Electricity	NYSE
FE	FirstEnergy Corp.	Electricity	NYSE
FPL	FPL Group Inc.	Electricity	NYSE
NI	NiSource Inc.	Gas Distribution	NYSE
PCG	PG&E Corp.	Electricity	NYSE
PEG	Public Service Enterprise Group Inc.	Electricity	NYSE
SO	Southern Co.	Electricity	NYSE
WMB	Williams Cos.	Multiutilities	NYSE

The DJI Index Components