Sunday, July 27, 2008

S&P 500

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On July 21, 2008 in my "Short Technical Analysis" post I highlighted the possibility of the drop down after the strong recovery we saw after July 15, 2008. In a day, on July 23rd the market started to drop and continued its slide by the end of the week.

The question that I would put is "will the market continue its drop lower to retest the most recent lows?"

To answer this question I look at my 60-day chart to see what the recent volume balance and the sentiment on other technical studies. It is worth mentioning that the Nasdaq 100 spent last week differently than the S&P 500 and DJI indexes. As a result the picture on the Nasdaq 100 chart differs from the S&P 500 and DOW(30) charts. While the S&P and Dow Jones index point to the higher odds of the further drop, the Nasdaq 100 index does not look as pessimistic.

Below you may see the S&P 500 60-day chart.

S&P 500 chart
Overall, the technical analysis on the chart above shows the danger of the further market crash:
1. The SBV oscillator is on its way down and indicates the negative sentiment.
2. High MVO on July 23, 2008 reveals that we had strong volume during the price up-move which pushed the stock market into the short-term oversold stage at least. There is no doubt that this volume surge has a power to push the market lower and we already did face 3-day stock market crash.
3. The Advance/Decline oscillator moves up and it is actually a good sign - a sign in the favor of a recovery.
4. Both RSI and Stochastics have dropped below their critical bearish levels. They point to the negative stock market sentiment.
5. McClellan Oscillator is more or less neutral with some potential to the bear market.
6. Despite the 3-day drop down the VIX volatility index is almost flat and is neutral as well.

Again, the about points are related to the S&P 500 and Dow Jones Industrial indexes, the Nasdaq 100 index is less negative and I would even assume may push the market higher.

Yes, overall technical analysis based on the 60-day chart reveals higher odds of the further slide. Yet, personally, I would not play short, since looking on the 1-year chart (see my July 20th DJI post) I see that the market is heavily oversold in the mid-term.  Based on a yearly chart I do not believe that the recent slide may continue very deep down, I would more closely look at the 60-day technical indicators with expectation on a strong reversal. Yet, I could be wrong - my technical analysis is not 100% perfect...

Monday, July 21, 2008

Short Technical Analysis

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Yesterday in my "DJI" post I have described 3 possible ways of a further trend developing over the short-term. I stated that personally I believed in higher possibly of the third scenario by which the stock market after a flat move may react on the high volume surges generated on July 17-18, 2008 and start to move down in order to retest the most recent lows (July 15 lows) - today we faced relatively flat market and it confirms my statement. Those high volume surges during the price advance did halted and stopped the recovery.

Again, I have repeat myself, my strong opinion is that the chart should be analyzed on daily basis. By monitoring the 60-day chart, today, on all three indexes (DJI, Nasdaq 100 and S&P 500) I see that McClellan Oscillator moved even lower down into negative territory by overcrossing zero line. Stochastics and RSI started to move down and dropped below 80 and 70 levels respectively. SBV started to decline as well. All of that tell me that most likely I may see further development of the third scenario and now I consider that the odds are on a move down.

I do not know know how deep the market may drop (if it's going to drop at all) - it could crash only a few points or it could run to July 15 lows and even lower. If the indexes move down, I would expect to see high volume again. Then, depending on a magnitude of that volume it would be easier to judge when we may see reversal. That's why I have one recommendation only: "Do your homework" - analyze charts on the daily basis.

Of course my technical analysis could be wrong and market still may ignore July 17-18 high volume and continue to move up.

My view on the 1-year chart is still the same as before (see my previous posts).

Sunday, July 20, 2008


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We had very nice move up this week. In spite of negative media pressure who threatened us that another 90 financial banks more likely will follow IndyMac path, the Dow Jones Industrial index is 6.2%, the S&P 500 and the Nasdaq 100 indexes are 3.5% up from the July 15, 2008 lows. Already on July 8, 2008 in my "Stock Market Crash" post I highlighted that the market is heavily oversold and we may face the strong and fast recovery movement. However, the market moved lover and on July 14, 2008 in my "Charts Technical Analysis" post I did take a look at 1-yer charts to confirm my expectation on the market recovery. I stated that the stock market is heavily oversold and that even if the market intends to drop further down, before, it need to release the oversold pressure in the recovery movement. I pointed that the Nasdaq 100 is not as oversold as the S&P 500 and DJI indexes and we saw the Nasdaq 100 behind the other indexes rally up.

I always mention about importance of the monitoring the charts during the trading hours. By looking back on the 60-day index charts we may see that on July 14, 2008 the Advance/Decline Oscillator started to advance by pointing to the shift in the market sentiment. On the same day the SBV oscillator started to advance indicating the possibility of the recovery. Shortly after the market open on July 16, 2008 the MVO become equal to zero and McClellan Oscillator overcrossed zero line by confirming the bullish sentiment. So, I do not think that those traders who follow charts are surprised by this recovery.

Now, looking forward, we have the same question - what's next? Will the DJI and the S&P 500 indexes follow the Nasdaq 100 drop on Friday or will the recent recovery continue? I would put this question in other way - did the recent recovery release the longer-term oversold power at least partially in order to resume the down-trend? and I would put other question - looking on the recent week, did the market become oversold in the shorter term?

To answer on the first question I have to look at my 1-year chart (the chart I mentioned in my "Stock Market Crash" post).

DJI chart

The technical analysis applied to the yearly charts tells me that the stock market is still heavily oversold:

  1. SBV is still negative and still moves up;
  2.  I see only red MVO (no green MVO - no volume surges to the price up-side);
  3.  Stochastics only started to move up;
  4. VIX volatility index only started to decline and still is above 20;
  5. MACD is not even crossed zero line on its move up from the negative area.
All the technical indicators above point to the beginning of the development of the recovery and high possibility of further up-move. The 1-year chart definitely does not show any release of oversold power and it does not show that the market has become overbought during the recent week recovery. Based on this chart I would assume that we may see further move up.

To answer the second question I have to look at my 60-day index charts and see what my technical analysis tells me about shorter time-frame. Since the Dow Jones Index has made the strongest up-move I have emphasize my attention on that index.

DJI chart
From the chart above we may see that the 60-day DJI technical analysis overall is positive and points to the possibility of the further up-move:
  •  the SBV is still very high - could be premature to talk about changes in the bullish sentiment;
  •  the Stochastics and RSI are above 80 and 70 levels respectively by pointing to the bullish sentiment as well;
  • VIX volatility index is moving down, away from its July 15, 2008 high when it run above 30.
  • McClellan oscillator started to move down, yet, it is still far above zero line and it could be premature to talk abbot reversal based on this technical indicator.

The only negative fact I see on the DJI chart is high volume surges during the index run up on July 17-18, 2008 (see green MVO). There is a high possibility that this high volume pushed the indexes into short-term overbought territory and the fact that MACD and McClellan oscillator started to move down shows the possibility of the market reaction on that volume. The technical studies on the S&P 500 index chart looks almost the same as on the DJI chart, yet the 60-day Nasdaq 100 chart has less positive and more negative points.

Again, I would bring up 3 possible scenarios of the further development:

Scenario #1: Stock market reacts on July 17-18 high volume and drop down - in this case it can drop lower the July 15 lows.

Scenario #2: The stock market continues to move up by ignoring the July 17-18 high volume. The market is at high oversold levels and it has power to continue the rally.  That would tell me that this high volume was generated not by buyers but sellers who considered this small recovery as a good point to sell short. In this case I would tell that, most likely, those sellers pushed the market even into stronger oversold stage and we may see even stronger recovery.

Scenario #3: The July 17-18 high volume slows down the advance and the stock market continue to move up or sideway with further retesting of the most recent lows and collecting more downside volume before final reversal.

Personally, I would stuck with the scenario #3, simply because I already see some changes in the McClellan, MACD. In addition the Nasdaq 100 is not as oversold as the other indexes. Yet, I could be wrong and may only recommend to monitor and analyze charts.

Monday, July 14, 2008

Financial Sector

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IndyMac is down, yet the stock market (Nasdaq 100, S&P 500 and DJI indexes less then 1% down only). On the day when Bear Fund was down the US indexes crushed almost 4%. It looks like this collapse did not generated panic selling or maybe there are not a lot of traders who is willing to place short order (create selling demand) – who wanted to sell already sold and now is in short position. So, for how long will the financial sector try to push the market lower?

Saturday, July 12, 2008

Charts Technical Analysis

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Another, crazy week is behind. We saw strong slides and we saw strong recoveries. The feeling that the stock market is manipulated was following me the whole week - the indexes declined even when the majority of stocks were in advance - on one day we had a news on Government attempt to give a help to financial institution on the next day we hear that these institution do not need such help. How many else surprises wait for us?

Overall, despite all negative pressure, all negative news the Nasdaq 100 index slide down only 5 points (0.3%) over the week. Keep in mind that the Nasdaq 100 index is a basket of 100 non financial companies and as a result less affected by the financial sector than the S&P 500 index and DJI index. As a result of the week the DOW index lost 188 points (1.7%) and the S&P 500 index lost 23 points (1.9%).

The question is what will the next week bring to us? Will the financial companies be able to push the stock market deeper down despite the heavily oversold stage? We saw such attempts during this week, yet we saw that the rest non financial part of the stock market tried to move the market up (we witnessed a few attempts of strong recoveries).

Last week (see my previous "Stock Market Crash" post), based on the technical analysis of the 60-day chart I have made an assumption about a possibility of the strong recovery. Yet, the market is still down. Intraday market crashes, when the Nasdaq 100 index dropped for 3% (on Friday July 10), made traders to believe that the market was going to crush even more, and I think not a lot of traders accepted the same strong recovery later on the same day as a sign of the oversold market. I think that majority of traders still believe that the market will go further down and they do not dream even about a small recovery. Maybe they are right, maybe the stock market will be lower, yet I do not think that it’s going to be "tomorrow". As I mentioned before, I see the extremely high oversold levels and on my opinion we are on an edge of a strong recovery. Even if the market tends to be lower, before, I believe it has to release some oversold power in a recovery movement.

If we compare the October 2007 – January 2008 stock market crash, with current May - July 2008 down trend we will see different price behaviors. If during the Oct-Jan crash when the indexes dropped for 2% then in majority cases they continued to drop even further. However, during the current down trend very often we witness the scenario when the indexes dropped down for 2-3% and then they moved up in strong recovery within a single session (especially over the last two weeks). It tells me that the market is driven down by a few negative companies (like Fannie and Freddie) while the rest of the market tries to recover from the heavily oversold levels. That is why I have put a question above for how long the financial companies are able to push the stock market deeper down despite the heavily oversold stage.

In order to review my position about the current market, this week, I decided to take a look at yearly index charts to see the longer term tendency of the stock market.

Chart #1: Dow Jones Industrial Index (DJI) 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)

DJI chart

Chart #2: S&P 500 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)
S&P 500 chart
Chart #2: Nasdaq 100 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)

Nasdaq 100 chart
Personally, looking at technical analysis of 1-year chart I would consider it risky to play short at this point of time.

Tuesday, July 8, 2008

Stock Market Crash?

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My yesterday's and today's post look like exception from the rule. I do not usually make any comments in my blog during the week. Yet, I do it now because of the changes we see in the stock market and I need to put my thoughts in the correct order. Writing down a few points usually helps me with it and keeps away my emotion from my technical analysis.

In my "Nasdaq 100 is Behind" post on July 1, 2008 I described two possible scenarios on my opinion of the coming reversal. Over the past week we saw developing of the second scenario where the Nasdaq 100 pushed indexes lower. I mentioned that in any cases I would watch for high volume surges that may indicate the end of the downtrend and possibility of a reversal. Yesterday, in the "Advance Decline" post I have pointed on the interesting Advance/Decline behavior and high volume surges. I do not think that today's strong and sharp recovery should be a surprise.

I believe, the main question for me now is to consider if today's strong up-move is a beginning of the recovery or it is just volatile market before further slide...

By looking at my favorite 60-day charts (which I use to analyze 2-10 days trends), after today's rally I may say that all my technical indicators are bullish and point to the higher possibility of the further development of the recovery:
- SBV started to move up;
- I see big number of volume surges during the recent decline;
- McClellan Oscillator is on the up-side;
- Stochastics and RSI bullish as well;
- Advances and Declines points to up-trend;
- VIX Volatility index dropped down.

What I like is that all the indexes (Nasdaq 100, S&P 500 and DJI) show similar bullish sentiment on all technical indicators. Basically, my technical analysis points the higher odds of up-trend.

Yet, there is two things that makes me worry and which will press me to monitor charts more closely:
1. Today's rally was on the high volume which may push the stock market down again.
2. It's a rare situation when the market make a reversal from the down-trend without at least second attempt to hit the bottom.

Basically, I see 3 scenarios of the possible further development:

Scenario #1: Stock market reacts on today's volume and continue to decline. I would be very difficult for the market to do it due to the high oversold state. It's difficult to believe that today's advance relapsed all oversold power and hifted stock market into the oversold state. Personally, I would not expect to see that scenario, yet, there is always a possibility of me being wrong.

Scenario #2: The stock market continues to move up by ignoring the today's high volume during the advance. The market is at high oversold levels and it has power to continue the rally.

Scenario #3: The today's' volume slows down the advance and the stock market continue to move up and then side way with further drop and retesting of the most recent lows and collecting more volume before final reversal.

I believe the next few trading session will more reveal the intends of the market. It would be nice to see drop in the trading volume as a confirmation of the recovery.

Monday, July 7, 2008

Advance Decline

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As a rule I do not make any posts during the week. Yet, today I witness interesting situation. S&P 500 advance decline oscillator and ratio were not as negative as it supposed to be during such index slide. The same was in the DOW sector.

Very nice volume in the middle of today’s trading session and very nice recovery right after that…

It was funny to read financial news today. Over the last few months the news tried to put in the head of investors the fact that the market moves down because of high oil prices. Today, when the oil was down and market was down – the media has found another explanation to the market slide and surprise – IT WAS NOT OIL. Maybe at the end the high oil price is not a reason of the market down move? Or maybe we should \never trust media and never based our trades on the media analysis of the stock market.

Technical Analysis - Volume Oscillator

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VO (Volume Oscillator) is one of the basic volume based indicators used in technical analysis. Such indicators as MVO (MarketVolume Oscillator) and PVO (Percentage Volume Oscillator) are based on the Volume Oscillator and it could be useful to understand the physics behind the Volume Oscillator in order to understand the other volume based technical indicators.

The Volume Oscillator formula is very simple and it is based on two volume moving averages (VMAs):

Volume Oscillator = [Fast VMA] / [Slow VMA]
Fast VMA is shorter-term VMA
Slow VMA is longer-term VMA

From the formula above we may see that the Volume Oscillator show the difference (ratio) between two volume moving averages. Volume moving average is average volume over a specified period of bars. If we set Fast VMA bar period equal 1 and Slow VMA period to 10 then on the daily chart (1bar = 1 day) the Volume oscillator will show how big or small is the current volume bar in relation to the average volume over the last 10 days.

The definition of the Volume oscillator could sound like: "The Volume oscillator shows where the current volume is in relation to the average volume over a longer period of time."

The Volume Oscillator becomes very useful in analysis of the volume surges because it gives mathematical evaluation of the volume surge in relation to the average volume over a longer period of time. That helps to use the mathematical representation of a volume surge in a developing of a trading system or building a trading strategy.

Volume Oscillator is very similar to the PVO (Percentage Volume Oscillator). These two technical indicators basically have the same meaning with the only difference that PVO evaluates volume surge in percentages while Volume Oscillator represents the magnitude of a volume surge as absolute value.

It is common practice to use several indicators in technical analysis. By joining Volume Oscillator with price technical indicators we may separate volume surges (when VO > 1) during the price move down from volume surges during the price move up. The high Volume Oscillator assumes abnormal volume activity and we may classify the volume surge during the price decline as panic selling and volume surge during the price advance as greedy buying:

  • When VO is above 1 and the price of a stock declines it indicates that this decline generates bigger than normal volume over the longer period of time. We have abnormal volume – more traders are in the game – a stock decline generates panic selling. The higher volume oscillator value is during a price decline the stronger panic selling we have on the market;
  •  When VO is above 1 and the price of a stock advances, it indicates that this advance generates bigger than normal volume over a longer period of time. We have abnormal volume – more traders are in the game – a stock advance generates greedy buying. The higher the volume oscillator value is during a price advance the greedier buying we see on the market.
Keep in mind that the volume is always a two sided transaction. Volume = 1 means that we have 1 buyer and 1 seller. When we have high volume surge during the price declines it does not only mean that we have panic selling, that also means that we have somebody who satisfies demands of the panic sellers and that could lead to the changes in the supply/demand balance and as a result we may expect a trend reversal.

The similar logic could be applied to the volume surge during a security price advance. The price of a stock moves up when we have more buyers than sellers. At the moment when we see big volume surge during the price move up we may say that some sellers decided to satisfy the big number of buyers which may lead to the luck of buyers (buying power for further up-move). The bigger a volume surge is during the stock price rise - the bigger number of satisfied buyers do not place trading orders any more (all funds already invested). As a rule that leads to shift in supply/demands balance, reduced number of buyers and as result we may see correction down or even market crash.

The difference between greedy buying and panic selling is that the greedy buying could be spread over time while the panic selling as a rule is a short lived process and that’s why we have bigger and stronger volume surges at the support points than at the resistance levels.

technical analysis has dozens of the various technical indicators in its arsenal. On my opinion, before using any of the technical studies, it is important to spend time and learn about it as much as possible. Only then a trader may analyze mistakes (lost trades) and  only then a trader may correctly adjust a technical indicator to the current market conditions.

Saturday, July 5, 2008

Index Technical Analysis

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The past week the Nasdaq 100 pushed the stock market deeper down, while the DJI and S&P 500 indexes struggled to recover from the oversold levels (one of the scenarios mentioned in my previous "Nasdaq 100 is behind" post).

If I take a look at my standard chart setting I still see mixed picture:

  • The DJI index shows strongly oversold levels. McClellan Oscillator, MVO, RSI Stochastics and other technical indicators on the 60-day chart point to the higher probability of a recovery. As we saw that during the last two trading session the attempts of the Dow Jones Industrials to start a recovery.
  •  Taking look at the same 60-day technical indicators applied to the S&P 500 index I see that on one side McClellan Oscillator, RSI and Stochastics points to the recovery and on the other hand the SBV still decline and MVO is still below zero line. Yet, the S&P 500 the same as DJI is heavily oversold.
  •  The Nasdaq 100 index is less oversold than DOW and S&P. The SBV still declines and MVO is still below zero by pointing on the possibility of the further slide. The Stochastics is still negative while the RSI is positive. The McClellan oscillator is almost flat, yet, I may say could be considered positive as well.
As I see from my 60-day index technical analysis the market is still mixed and in spite of the oversold Dow Jones and SP the Nasdaq 100 still has room to push market lower.

If I look at 1.5-year chart I see very nice, very huge volume during the index slide in the S&P 500 and DJI sectors. These volume surges are heavier than those that reversed the stock market in March 2008. Based on these volume surges I would say that we could be on the edge of the recovery. On the other hand, the same 1.5-year Nasdaq 100 chart shows almost flat volume during the Nasdaq 100 slide.

So, what I would expect from the market…. Personally I would bet more on the recovery than on the further market drop. Even if we are in the long-term stock market crash, on my opinion the market has to make at least a correction and move up before dropping further down.

If you read my blog, please, keep in mind, that I analyze 1.5-year and 60-day chart not to define mid- or long-term trend. I need more this technical analysis to adjust my short-term trading system to the odds of the general market trend.

Tuesday, July 1, 2008

Nasdaq 100 is behind

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No post past weekend – went surfing...

Has to be very short… Trying to post during my major work...

Can say one thing – I’m watching out for volume… I see strong volume during the index drop in DJI and S&P 500 sectors and I consider that Dow Jones Industrials and S&P 500 indexes are heavily oversold. Yet, they are oversold not as strong as in January 2008, however, stronger than in March 2008. The NASDAQ 100 index is quite behind. It slid down without generating the big volume surges. While DOW (30) broke its January and March 2008 lows and S&P 500 came close to the March 2008 low by breaking the January 2008 low, the NASDAQ 100 index is still far above its low levels – no wonder we do not see the panic selling in the hi-tech sector.

What do I expect? – In one of the scenarios I would expect to see is a strong volume surge which would indicate the climax of the panic selling after which the market could strongly reverse its trend. In this case the stock market has to ignore the fact that the NASDAQ 100 stocks are not as oversold as the rest of the market. Another scenario I see is that the NASDAQ 100 may start to push the market down by trying to catch other indexes in the current crush. In the second scenario I would expect to see high volume which would indicate the climax of the panic selling as well.

That is why I am watching volume now...