To take closer look at the current sentiment on the stock market as well as to define the general market tendency I decided to take closer look at higher-time frame chart in particular on 2-year DJI chart.
Chart #1: DJI index. 2-year chart. 1 bar = 2 days. SBV(10), MVO(5,25,3).
From the chart above we may see the extremely high volume surges during the recent crash. Starting from the middle of September 2008 we had records in daily trading volume. The history of the stock market did not see such extremely huge panic selling ever before. This high volume tell us that the extremely huge number of investors left the market, yet we have some group of other investors who was buying in that period at small bargain price - some traders decided to satisfy demands of those who were leaving the stock market in panic. That is why we had this high volume (volume is two side transaction - for each seller there is a buyer).
The average trading volume on NYSE in 2007 was about 3.1 billion shares per day. The average NYSE trading volume in period from the middle of September 2007 until now is about 7 billion shares per day. Starting from September 8, 2008 more than 130 billion shares were traded. Even by assuming that the average price of a stock on NYSE is only $10 per share it will give us more the 1.3 trillion of negative money flow (out of the market).
As a rule, after a huge amount of money is taken out of the market (when SBV declines) we see a rebound (investors start to invest again). From the chart above you may see a rebound each time after SBV decline in August 2007, November 2007, January 2008 and July 2008. Each time when SBV start to advance after being at low negative levels we see that it indicates positive money flow (investors coming back). Sooner or later the investor that left the market in the result of the recent crash will come back and start to inject funds into the stocks. It could be tomorrow, it could be in a week or even a month. When it happened depends on the current political and economical factors affecting the stock market and how fast the investor could be reassured in the coming stability.
At the current moment the declining SBV on 2-year chart show that the Bearish sentiment is dominant among the mid- and long-term investors. Yet, as soon as we start to see advancing SBV on this chart we may assume that the long- and mid-term traders start coming back which may lead the market up and which could be an indication of the rebound. Taking into the account that we had extremely high volume surges during the recent crash we may expect very strong up-trend.
To better anticipate a possibility of the trend reversal we may always consult lower time-frame by applying the same technical indicators to 60-day chart in our case.
Chart #2: DJI index. 60-day chart. 1 bar = 1 hour. SBV(20), MVO(5,25,3).
From the 60-day DJI chart (see chart above) we may see that the critical moment in the recent crash happened in the period from September 15 until September 19, 2008. Exactly in this period we saw the biggest volume surges and also in this period the biggest transfer of the shares occurred. When we see the big number of shares (big volume) is changing hands during the crash it tell us that the number of panic sellers is dramatically reduced (their demands are satisfied – they sold) which may lead to the shift in the supply/demands balance. After that starting from the September 20, 2008 we still see negative money flow, yet the trading volume is dropping and the number of investors leaving the marked reduces (the red SBV areas become smaller and smaller). That reveals that we see slow change in the sentiment on the stock market and we could be in the beginning of the new uptrend.
In Summary: Overall we believe that we are in the begging of the strong reversal which was defined in the middle of the September by huge volume (extremely panic selling) that pushed the stock market into strongly oversold levels. The exact day when the big long- and mid-term investors start to come back depends on many factors, yet we already see a begging of this process on the 60-day chart. From the more conservative point of volume based
technical analysis it could be recommended to wait for a confirmation on the 2-year chart when SBV(10) starts to advance.