Monday, September 22, 2008


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Ok, as I mentioned in my last "Index Volume" post on September 16, 2008 we had it - sharp and strong recovery. Just in 1.5 trading session (from noon of September 18, 2008) the Dow Jones Industrials run up about 1000 points!!! I expected to see the indexes at September 12 levels and they (DJI, Nasdaq 100, S&P 500) are there.  I've already pointed to the meaning of the huge volume during the price slide in my "DJI Volume" with bringing to attention (in the "S&P 500" post) similar occurrences of the high volume surges in the past and the price reaction on such huge number of transaction.

I do not think there were a lot of traders who was able to open a long position over the last 1.5 trading session. I believe many traders under the media negative pressure were still trying to play short by using this recovery as a possibility to open a short position and then desperately were monitoring and thinking why the market does not go down with all these bad news... I've already mentioned my "friendly" feeling to the media "I do not trust them!!!" - They always look right by explaining the stock market after the fact. When oil goes up and the DJI drops they tell us that the investors are disappointed by high oil prices and on the next day when oil drops and you expect that investors should be happy you see another day of the DJI slide and guess what, again media is right by explaining you that investors were disappointed by bad situation in financial sector...

As I already said I'm ready to pay for a year of service that provides the volume for indexes in order to have just one such beautiful moment. With volume indicators I have fun by watching the news and their explanation of the market. Stock market is not as it was 10-20 years ago. Look at the NYSE volume 10 years ago - we have now much more speculators in the market and it cannot be ignored... 

The market is always described by price and volume and using technical analysis based on the price indicators only I consider as watching a TV with half of the screen covered. The same with volume I believe it's wrong to base the technical analysis solely on volume. There should always be at least one price based and one volume based technical indicator in any trading strategy, which one should be main and which one confirming it's another point. Only analysis of price movement together with volume flow may give the clear picture of the stock market processes.

So, we see the DJI, Nasdaq 100, S&P 500 and other indexes above the September 12th levels and the question is now "Will it run further to the August 28 and August 11, 2008 highs?"

DJI chart
By looking at the chart above I may say that we have great deal of the volume accumulated during the recent stock market crash, I believe that the market is still heavily oversold and it was not released from this oversold stage over 2 nights (since Thursday) it still has power to run up and so far all the technical indicators I use are positive:

  • SBV is on its way up
  • MVO show big oversold power
  • Advance-Decline is rising
  • RSI is rising to the 70
  • Stochastics is above 80
  • McClellan Oscillator is rising

Mainly based on the MVO I would assume that the odds are very good to see the indexes at August 11, 2008 highs.


Founder, Master 'O' Equity said...

I am an advocate of a pure and simple price/volume approach as well but knowing the limitations of technical analysis, the timing of the next rebound may be more tricky than straight forward. In fact, big volumes may not spur the instant reaction it used to during normal market conditions.

Nice work so far, keep it up! :)

TraderJoe said...

That’s right. Very often we do not see immediate reaction on the volume surge. There is often a period before rebound. I call it distribution period. High volume surge for me is the critical shift in the supply/demand balance (when group of traders decided to satisfy demands of the general trend traders), and distribution period is needed to establish the dominance of the buyers or sellers on the market. As a rule the distribution period in the resistance is more prolonged and less volatile wile in the support it could be very short with high volatility.

In addition there could be situation when volume surges as well as other technical indicators could be ignored. For me there could be two answers:

a) take a look at higher timeframe - the shorter-term trend could be under influence of the higher timeframe trend and technical indicators on lower timeframe charts could be ignored because of that. And that is why I recommend analyzing several timeframes – a trader has to know general market trend;

b) if you analyze individual stocks, take a look at the index that covers this stock – you have to know what is the general tendency of the market sector your stock belongs to. If the financial sector is crashing then even if your financial stock looks bullish most likely it will be dragged by industry trend down as well.

In addition to all above you may notice I analyze indexes only, I do not analyze stocks. Why? I do not believe in the pure technical analysis applied to individual stocks. On my opinion if you trade stocks you have to combine technical and fundamental approaches.