S&P 500

As I mentioned before (read my NASDAQ 100 post we had a strong recovery. Yet, the last day of the week, we saw 2% pull back on the NASDAQ 100 and around 1.5% drop on the S&P 500 and DJI. The main question now is: Was the strong rally up on January 23-24 a beginning of the mid-term up-trend or this was just a correction up during the dominant Bear market?



The main indicators on my chart show that we have strongly oversold market and there is no way that January 23-24 recovery could move market into overbought condition. With more confidence I may say that I assume that we are at the beginning of the mid-term up-trend. I base my assumption on the fact that we had strong volume accumulation during the recent crash; we had huge volume surges during this crash that indicate the extremely high panic selling. The fact that we saw reduced volume activity on January 25 may indicate that worries of the traders go down. The VIX volatility index is down (29) after hitting high (34) on January 23. That suggest that investors are calming down or we may assume that the number of investors who is in panic is reducing. That should not be a surprise after those volume surges we saw. Many investors who was in panic already sold… As I always mentioned before, the main question is “who bought from them”. There no doubt that there are some forces on the market that are buying now from those who sells in the panic – that’s why see the big volume surges.

Again coming back to the chart I may see strong mid-term bullish indicator, however, digging into lower timeframe I may see the possibility of the down market. If we take a look back in the history we will see that in majority cases the downtrend is very volatile at the bottom and we may see at least one strong attempts to retest the resistance level before the major up-trend become stable:

We saw attempts to retest lows on August 27-28, 2008

On March 13-14, 2008 the market retested March 5, 2007 resistant level before moving up

On July 16, 2006 the market retested the June 13, 2006 resistance.

Even taking look at the long-term downtrend in period from 2000 to 2003 we may the S&P 500 retested the July 24, 2002 low twice: on October 9, 2002 and second attempt was on March 13, 2003.

In summary I assume that the odds are on the side of the mid-term Bull market, yet, I see the possibility of further slide and even retesting the recent lows. Again, the market is very volatile and for more conservative statement about the mid-term up-trend I would like to see the indexes moving up and making new highs. So far the market is still in the dangerous zone…

Strong Reversal

Today we saw volatile session with strong opening down on the NASDASQ 100 and then even stronger recovery when the S&P 500 and DJI managed to recover not just from today's session but from the previous two sessions as well.

Today's strong reversal occurred right after the huge volume surge around 13:00 EST. It could be that this was the reversal and from now on we could be in the mid-term up-trend.

The positive point that I saw today is the fact that during today's recovery we saw big volume surges on the intraday charts, however they were ignored and the indexes continued their rally up. As a rule it is one of the characteristics of the up-trend when the market moves up by ignoring the big volume to the price up-move. It tells me that the buying pressure is increasing and supply of sellers is dropping. As I already mentioned before in my “Long-Term” post on January 12, 2008 it could be a first sign that what we see is real reversal.

Supply and Demand

Strong decline and strong recovery.

Today we had very scary opening, but very nice recovery. The fact that S&P 500 and DJI recovered almost 2.5% is promising. The NASDAQ 100 recovered almost 3% from the bottom. It was very sharp recovery. Already in the first15 minutes of trading the NASDAQ 100 already gained 2.5% back. I may assume that such strong rally up was caused by the fact that we had today more buyers then sellers and those who was buying was ready to pay higher price. It looks like a lot of traders decided to buy at low, at least their demand was stronger then supply of those who still in panic tried to sell. There could be a possibility that we may see the shift in the supply/demands balance and today could be marked as beginning of the reversal. Yet, it could be too early to talk about reversal when the market is still to close to the lows. Even if this is the beginning of the up-trend we still may see very volatile market…


My mid-term is very optimistic…

NASDAQ 100

As promised, I post a chart with some points. This time I used NASDAQ 100 chart, however, majority of the indexes, including S&P 500 and DJI indexes look similar. Some difference could be seen on the DJT (Dow Jones Transport) where the lowest point was hit on January 14, 2008, while on all other indexes it was on January 18, 2008.

I’m on the Bull side. More and more I believe that we are on the edge of the strong reversal. It could be tomorrow, it could be in several days, but, I assume that the market will move up and it will be much higher then we are now.



All indicators point to the extremely oversold market in short period of time (2 weeks). The only VIX shows the high values that may indicate that we may see further decline. Even if we are in the long-term run down (I would not state it now), for further move down the market in need a correctional move up.

The most challenging question for many traders could be when to open or close the position in the current situation. I usually do not talk how to trade but in the current market it’s would be scary for me to play short, I would rather stay in cash and wait for up-trend confirmation indicators or open a long trade without stop-loss (in such volatile market the early opened long position may result that the stop-loss could be hit very easily) with possibility to wait in case the market drops lower.

Of course I could be wrong. It my personal view on the market, and I do not really believe in news, especially those that are published on the Yahoo Finance and CNN money. I’m sorry if it goes against what the news state - this is lust my opinion on the current market.

Big Volume

Big Volume –> “Big Money” -> Big Changes

Even the indexes dropped less then yesterday (-1.15% today versus -2.82% yesterday on the NASDAQ 100) and today's decline was on huge volume surges. In fact, today's volume output exceeded the average volume generated over the past nine sessions by 51% on the NASDAQ 100, by 22% on the S&P 500, and by 49% on the DJI. Today's NASDAQ 100 volume is one of the highest daily volumes in the NASDAQ 100 history. The only volume higher then today's, was S&P 500 which was noted on August 16, 2007. Same as for NASDAQ 100,today's DJI volume beats the records.

More then 4B shares were traded today in the S&P 500 sector, more then 1.5B in the NASDAQ 100 sector and more then 1B on the DJI. The S&P 500 volume was today higher then the average daily volume on the NYSE over the last year.

Today NASDAQ 100 and the DJI indexes came close to the August 16, 2007 low (resistance line). The S&P 500 index dropped below the August 16, 2007 low and almost hit the march 14, 2007 low (another resistance line). No doubt that today the market hit patience and stop-losses long-term traders. the question is WHO BOUGHT FROM THEM SUCH BIG NUMBER OF SHARES. I will not believe that such huge volume was generated by retail traders and intraday speculators… Some “big money” was involved in today’s trading.

It’s difficult to say that this was the moment and now we are at the door of the long-term up-trend again. To make a statement about long-term I would like to see the mid-term first and I believe we are at the door of the new mid term up-trend.

Volume

In my last 2 posts I mentioned that for beginning an up-trend I would like to see the market ignoring the big volume surges to the price up-side. I do not see this scenario. We saw today strong reaction on the yesterday afternoon volume.

Resistance

Sorry, no chart today. However, there are several points that make more optimistic that today’s up-move could be a beginning of stronger up-move.

By referring to the chart described in my “NASDAQ 100 Chart” post I may confirm some positive signs:
- The VIX (volatility index) started to decline;
- Advancing issues are growing;
- MVO become zero after hitting low negative levels;
- Stochastics and RSI are moving up;
- SBV is in the advancing mood.

From 1 year chart, I may see that volume started to drop an all major indexes including S&P 500, NASDAQ 100 and DJI and this is a positive sign as well that may indicate that panic selling becomes exhausted.

Another positive sign that I see is that at the end of the session on January 9, as well as in the middle of the session on January 10, 2008 we may see big volume during the price move up, and I do not see the strong reaction on this intraday volume. In case of the down-trend I would expect much stronger and more prolonged in time move down. Instead we saw move down on January 11, 2008 and today the market in the positive mood again. Yes, we may see the reaction on these volume surges later; however I would say that if the market continues to move up by ignoring the intraday volume to the price up then we could be in the beginning of the mid-term up-trend….

I hope I’ll post some charts later that could explain my points more visual.

Long-term

By looking on volume indicators we may say that in the last 5 months we faced huge sell offs. We may see the huge volume surges in the DJU sector in the period from the middle of July to the middle of August 2007. The similar situation could be seen on the AMEX. As a result of these huge volume outputs these two indexes are already in the up-move.

On the other U.S. indexes we do not see such big volume surges, however instead of the one correction we see up to three deep corrections on smaller then on the DJU and AMEX volume surges but still on the huge volume. We see it in the periods from the middle of July to the middle of August 2007, from the middle of October until the end of November 2007 and from the end of December 2007 until now.

We may assume that huge amount of the volume surges (panic selling) in the last five month may lead a lot of money out of the stock market. I would think that sooner or later these funds would find a way into the market again by generating a new strong uptrend. I know that many investors think that what have seen over the last five month is a beginning of the long-term crash, but I think there is good chance that what we see is a huge correctional movement within the long-term uptrend.

It's difficult to say when we may see the start of the long-term up-move. We still may see more volatility with more volume surges. The positive thing is that it's unlikely for the market to run into the long-term down-trend on such huge volume surges and such big panic selling. It's very difficult for the market to ignore these huge sell offs.

The only sing from the volume prospective that could make me cautious about possibility of developing long-term downtrend is that over the last 5 months I monitor the situation when the small volume surges are required to turn the indexes into mid-term down move and big volume surges are required to turn them back into up-trend. It would be nice to see the opposite which would indicate the beginning of the healthy up-trend.

The best case scenario for a resumption of the up-trend is when we see that indexes start to ignore big volume surges during the price move up – it may indicate we are in the beginning of the strong up-trend.

Advance Decline

Some more facts to think about:

In the period from July 2007 until now we may see 13 instances (trading days) when S&P 500 Advance Decline issues and Advance Decline volume ratios were below 0.11 which indicate an extremely bearish sentiment. We have not seen such a big number of panic selling sessions in such timeframe (5 months) even during the 2000-2003 market crash.

NASDAQ 100 chart

By taking a look back in the history we may see very volatile market since July 1997. We witnesses sharp declines and strong recoveries. In such volatile market I think it’s extremely important to relay on several trading indicators, monitor several timeframes and it’s better to stay in cash in uncertain situations.

Coming back to my favorite 60-day chart I may say that the technical indicators did not become more optimistic since last week. They were bearish a week ago and they are bearish now. The declining SBV, moving down MVO, decline in Advance – Decline difference, dropping MACD, RSI moving below 30, Stochastics moving below 20 and increasing VIX volatility index all points to the Bear sentiment. The picture is similar on all major indexes, including S&P 500, NASDAQ 100 and DJI.



The logical question that could be asked is when may we expect the reversal? By looking at the same indicators we may see some points that may lead to the possibility of the coming changes in the market sentiment:

- Over the last 6 trading days the NASDAQ 100 dropped more than for 7%, S&P 500 and DJI more than 5%. Throughout this period I see a lot of green on the SBV that may point that we may see the reversal soon. Yet, until I see it advancing and moving closer to the zero line I would consider the market weak.

- Over the last week I saw big negative MVO that points on the big volume surges to the price downside. As a rule after big volume surges we may see the reversal, but, again, I would like to see the MVO rising to the zero line.

- Advances and declines show extremely low readings over the last 6 trading sessions that may indicate that the market could become heavily oversold. Yet, I would prefer to see the difference between advances and declines growing before making any assumptions about recovery.

- For several sessions in a row Stochastics and RSI were moving below 30 and 20 lines respectively. It tells us that we are far from the highs and we had dynamic decline and this could indicate an oversold market as well. Again, I would not consider those indicators Bullish until I see RSI moving up and crossing the 30 level and stochastics moving up and crossing the 20 level

As I mentioned above the stock market has been very volatile lately and the market sentiment could change very fast. The indicators that do not look optimistic today can become Bullish tomorrow. At least we saw it very often over the last couple of months.

Market Crash???

Starting from the August 2007 we saw 20 sessions when S&P 500 lost or gain more then 2% in a single session. In the same period there were 11 occurrences when the DJI lost or gain more then 2% in a single session. Only back before April 2003, it was last time when we saw such big concentration of crashes down and rallies up (volatility).

In period from November 2007 until now we have witnessed 4 occurrences when the NASDAQ 100 dropped down or run up for more then 3% in a session. Again, the last time something similar happened - before April 2003.

Last time we saw sessions when the NASDAQ 100 has made bigger then 4% move:
January 4, 2007 – NASDAQ 100 crushed for 4.3%
November 13, 2007 - NASDAQ 100 made 4.2% rally up
February 27, 2007 - NASDAQ 100 made 4.0% declined down
And then it was only back on March 24, 2003 when the NASDAQ 100 lost 4.3%

So what happened back in March 2003???

February –March 2003 were the last months of the long-term market crash that started in 2000. For 4 years we had peaceful uptrend and now, starting from the end of the July 2007 we have creasy market. I have already mentioned about increased craziness in December 2007 (see my Volatility post), and now it become even more interesting. The question is: is this the begging of the long-term stock market crash or it’s temporary and we may see the up-move soon again?

Index Technical Analysis

Someone may ask "Why should I analyze indexes if I trade stocks only?”. By learning index charts and analyzing technical indicators to the indexes a trader may assume future market direction.

Thus, if after the index analysis a trader may predict where the tendency of the market is to be in the future, then this trader may more safely build his trading strategy. By having knowledge of the index trend a stock trader may decide if it is safe to open a trade or if it's better to wait for stronger indicators as well as the stock trader may manage the amount invested into a trade.

It's evident that a stock trader may benefit from the index technical analysis that goes along with the technical analysis applied to the traded stock from the basket of this index.

Below you will find some simple rules that use index analysis and could be added to any stock trading system:
- if the index analysis points on the Bull market and technical indicators applied to the stock suggest to see the stock traded higher, then buy;

- if the index analysis points on the Bull market however technical indicators applied to the stock suggest to see the stock traded lower, then ignore indicators and stay in cash or invest smaller funds;

- if the index analysis points on the Bear market and technical indicators applied to the stock suggest to see the stock traded lower, then sell;

- if the index analysis points on the Bear market however technical indicators applied to the stock suggest to see the stock traded higher, then ignore these indicators and stay in cash or invest smaller funds.

It is clear that index analysis should be included in each trading system even if it's not dedicated for index trading. In this case there should be fewer moments when a stock trader could be surprised why trading indicators do not work and why the traded stock moves in the direction opposite to analysis results.

Index analysis helps understand the general market trend that could not be received from the stock analysis. As a general rule, the market trend affects the stock trend and it's recommended to know the market direction before investing anything into any stock from this market.

DJT leads the market

Nice start for the year, of course only taking into account my pessimistic outlook represented in the previous report. For those who expected the market higher it was a really bad day.

So, taking back to my charts I only may say that they are still bearish (the same as I stated on Monday). The only thing that is changed is today’s volume output. The last time we saw higher then today’s daily volume on 10/21/2007. I may assume that it may lead to some recovery, yet the indicators are still point to weak market.

Let’s wait for another trading day. The last half of the year we saw very sharp and unexpected trend reversals. We could see it again. In this case I could say only that I would include additional lower timeframes charts to may screen and maybe paid more attention to Dow Jones indexes (DJI, DJU and DJT) – leaders of today’s drop…