Light Volume Trading

I have mentioned several times over the last time about side-way trading and more conservative approach would assume waiting when upper or lower line of this corridor is broken. So, we have upper line of the 2.5% corridor broken (see my previous "DJI" post on December 20, 2009). However, not many indexes have run over this level and I would not run into conclusion that now only Bullish market is in front of us. We may see that the Nasdaq 100 index run strongly up. We may see that theS&P 500 index advanced above upper line. On the other hand the DJI index, NYSE Composite index and some other indexes are still in their side-way corridor. This is not a very nice picture when some of the indexes are rallying up while other indexes are stuck in side-way action and I think it tells that the current move up is not something that is supported by a whole market.

When a rally on some indexes is not supported by up-move in whole economy there are good odds that this move may halt soon. It usually happens when the market is ready for a correction, yet, it does not moves down because group of positive market sectors (positive indexes) holds other indexes on the same level (in the side-way corridor). If this is the only thing that hold the market from the correction down, then this rally on the Nasdaq 100 could become exhausted very soon and then what?

From the prospective of technical indicators, at this moment, the sentiment is positive and suggests possibility of further up-move. However, this is a holiday season, we have light volume and historically this period of year is marked by slow and positive trend. I would not expect to see any strong movement next week, yet, in January 2010, I think, we could be surprised...

DJI

The purpose of technical analysis is to predict a possible future trend movement and, as a rule, predictions are based on the comparing the history and applying the history research results to the current market. This week I would like to show a few charts of Dow Jones Industrial (DJI) index. I selected 10-year and 6-month chart to demonstrate where the main indexes are at the current moment in relation to the longer-term periods.

From the 6-month DJI chart (see the first chart) you may see that the DOW index has been trading in narrow (2.5% wide) corridor for a month. I believe this side-way action has made many traders impatient to see when this pattern is broken and many of them, I think, expect to see strong correction, which would be logical after such strong recovery. However, I would not rush into short trade without setting a tight stop-loss strategy.

If you take a look on the second chart below (DJI 10-year chart), you will see that the DJI index is traded at the level which is inside of the historically defined long-term corridor. In 1999-2001 the DOW index spent 18 months in 8% corridor (between $10,000 and $10,800) and in 2004 we had 12 month of side-way trading in the same corridor.

Can we assume that we may expect to see the Dow index traded in the same 8% corridor for prolonged period of time now as well? What could be a reason that the Dow Jones index was in that 8% corridor for such long period of time? Maybe this is the level where the real value of the companies listed in the DJI index is: the Dow listed companies are not under-evaluated and they are not over-evaluated. If this is true then it would explain side-way trading before and we can expect side-way trading in the same corridor for longer period of time again.

Now, coming back to the 6-month DJI chart, we may see that the DJI index still did not hit the top of this 8% corridor. Because of that, the exit from the current 2.5% side-way trading still could be up toward the $10,800 level. This is why even when I see technical analysis results suggesting down move I would not play short without tight stop-loss.

Chart #1: The DJI Chart 6-month view of the current 2.5% side-way corridor
Chart #2: The DJI Chart 10-year view of the historically defined 8% side-way corridor

S&P 500 Chart

It is a month as the market has been trading side-way (see the S&P 500 index chart below). I have already been pointing on sideway trading in my previous posts (starting from November 15, 2009: see my "Technical Analysis" post), and it looks like the market continues to follow this pattern. Last week in my "Sideway Trading" post on December 5, 2009 I expressed my expectation to see some action on exiting from side-way trading, yet, it looks like we had another bounce from the lower line of the side-way corridor and now the indexes (S&P 500, DJI and Nasdaq 100) are headed to the upper-line of this corridor (resistance line).

At the current moment, the majority of the technical studies on my chart are bullish. However, we are coming closer to the upper corridor line and up-move become weaker and we may face another bounce down.

Now, after 1-month of sideway trading I would not bet on up-trend until I see the indexes, at least S&P 500 and DJI, are breaking strongly the resistance line (not breaking it for 15 min period and a for a few points only). At the same time I would not bet on the down-trend until I see the same indexes moving below the lower line (support line) of the sideway-corridor. The indexes have been trading in this corridor long enough to assume a possibility that overbought sentiment accumulated in the first half of November is not in force anymore and most likely it will not push the market down. Now, on my opinion, the longer-term sentiment is the only force that may push the stock market down. We may see that since July 10, 2009 the main indexes (S&P 500, Nasdaq 100 and DJI) were in the strong up-move and we may assume that they could accumulate overbought sentiment and without a new fuel (new investors coming into the market) we could face a strong correction (at least the same as we had in second half of June 2009).

Still, since we do not know what exactly may happen, we may wait for clearer and stronger signals. At least this is my view and my position on the current market.

Chart #1: The S&P 500 Chart with elements of technical analysis:

Free Quotes

This is just a quick post. I saw some free data that could be interesting to somebody and I would like to share the info.

I'll try to post my regular report today afternoon. Meanwhile, If you are interesting in some free data you may find free index quotes at the quote section of MV(http://www.marketvolume.com/quotes/). As a rule they do not show volume and advance decline quotes to the general web surfers and require "free trial" registration at least to see these quotes and data. However a few day ago they have opened access to the general public and you may monitor index volume and advance/decline data for free without any registration.

Below you may see snapshoot of some quotes pages.

At http://www.marketvolume.com/quotes/index.asp?s=SPX you will find free index quotes including volume and advance decline quotes

S&P 500 Index (^SPX)
Last Trade	1106.58		Advanced Volume	1,900,459 K
Trade Time (ET)	12/11/2009 16:00		Declined Volume	699,061 K
Change	4.41(0.40%)		Unchanged Volume	32,205 K
Previous Close	1102.17		Total Issues	500
Open	1103.96		Advanced Issues	315
High	1108.5		Decline Issues	121
Low	1101.33		Unchanged Issues	64
Volume	2,921,573 K		New Highs	46
Up Volume	1,647,332 K		New Lows	0
Down Volume	1,236,660 K		TRIN	0.96

Athttp://www.marketvolume.com/quotes/technical_analysis_price.asp?s=SPX y you my see price free based technical quotes.

S&P 500 Index (^SPX) Exponential Moving Averages Analysis

Indicator	Last	Change	Sentiment*
5-day Exponential Moving Average	1,101.95	2.28 (0.21%)	Bullish
10-day Exponential Moving Average	1,101.21	1.17 (0.11%)	Bullish
20-day Exponential Moving Average	1,097.76	0.92 (0.08%)	Bullish
50-day Exponential Moving Average	1,080.81	1.05 (0.10%)	Bullish
130-day Exponential Moving Average	1,031.35	1.17 (0.11%)	Bullish
260-day Exponential Moving Average	1,020.10	0.67 (0.07%)	Bullish

S&P 500 Index (^SPX) MACD(12,26) Analysis

Indicator	Last	Change	Sentiment*
EMA(12): Fast Exponential MA	1,100.76	1.04 (0.09%)	MACD sentiment is Bearish , although MACD Histogram moves up, it may indicate the possibility of coming changes in MACD sentiment
EMA(26): Slow Exponential MA	1,094.87	0.93 (0.09%)
MACD (12,26)	5.90	0.11 (1.94%)
MACD Signals: EMA(9) applied to MACD	7.70	-0.37 (-4.53%)
MACD Histogram	-1.81	0.48 (-20.91%)

S&P 500 Index (^SPX) Stochastics Analysis

Indicator	Raw Stochastics	Stochastics %K	Stochastics %D	Sentiment*
9-day Stochastics	62.00	48.31	40.31	Bullish
14-day Stochastics	64.31	50.11	41.26	Bullish
20-day Stochastics	64.31	50.11	42.48	Bullish

S&P 500 Index (^SPX) RSI (Relative Strength Index) Analysis

Indicator	Average Gain	Average Loss	Relative Strength (RS)	Relative Strength Index (RSI)	Sentiment*
9-day Strength	3.78	2.57	1.47	59.58	Bullish
14-day Strength	4.12	3.04	1.36	57.59	Bullish
20-day Strength	4.04	3.07	1.32	56.82	Strongly Bearish

Athttp://www.marketvolume.com/quotes/technical_analysis_volume.asp?s=SPX y you may see free volume based technical quotes.

S&P 500 Index (^SPX) VO, PVO and MVO (Volume Oscillators) Analysis

Indicator	VO*	PVO*	MVO*	Sentiment**
9-day Volume Oscillator	0.89	-11.46	0.00	No abnormal volume activity
14-day Volume Oscillator	0.91	-8.85	0.00	No abnormal volume activity
20-day Volume Oscillator	0.90	-10.11	0.00	No abnormal volume activity

S&P 500 Index (^SPX) MFI (Money Flow Index) Analysis

Indicator	Positive Money	Negative Money	Money Ratio (MR)	Money Flow Index Index (MFI)	Sentiment*
9-day Strength	19,464,228 M	16,174,684 M	1.20	54.62	Bullish
14-day Strength	25,424,639 M	24,840,144 M	1.02	50.58	Bullish
20-day Strength	39,849,790 M	32,077,759 M	1.24	55.40	Bullish

Athttp://www.marketvolume.com/quotes/technical_analysis_advancedecline.asp?s=SPX you may see free advance decline technical quotes

S&P 500 Index (^SPX) Advance/Decline Sentiment Analysis

Indicator	Last	Sentiment*
Advance/Decline Issues Ratio	2.60	Positive
Advance/Decline Issues Percentage Oscillator	44.50 %
Advance/Decline Volume Ratio	2.72
Advance/Decline Volume Percentage Oscillator	46.22 %
Advance/Decline Sentiment	72.68 %

S&P 500 Index (^SPX) TRIN Analysis

Indicator	Last	Sentiment*
TRIN	0.96	Trading activity in advancing stocks is approximately the same as in declining stocks
Average Volume per Advancing Stock	6,033 K
Average Volume per Declining Stock	5,777 K

There are more to quotes to chose from....

Sideway Trading

The indexes have been trading side-way since November 16, 2009. If you take a look at the Nasdaq 100, S&P 500 or Dow Jones Industrial charts you will see that since November 16, 2009 the main swing happened at the market open and majority of the time the indexes were traded side-way and basically they are at the same level were they three weeks ago.

The sentiment on the stock market becomes more intense. Second time since November 16, 2009 we may see increase in volatility which is not a very positive sing. The last trading session on Friday December 4, 2009 was quite contradictive - very volatile and on high volume - on lower time-frame index charts we may see bullish signals and on higher time-frames charts we may see bearish signals.

I would not say that the technical analysis is bearish at this moment. Majority of technical indicator are bearish at and taking into account an increase in volatility the one could say that the odds of the developing a strong correction are quite high. On the other hand, over the last weeks we saw very sudden changes in the sentiment when at the market close the indicators were bullish and on the next trading day at the opening the market was deeply down or indicators were bearish at the market close and on the next trading day at the open the market was strongly up.

Overall, I would say (strictly my opinion) that the bullish indications on intraday index charts are not letting me to trade short. At the same time bearish signals on higher time-frames make me scary to be in a long trade. In general, I would expect to see strong correction down, yet, intraday Friday’s strong bullish signals are somehow unexpected and do not fit in the general picture of the sentiment. Furthermore, I would stay in cash for a while. I think the coming week could be very interesting and define the trend. I consider that it is better to make less profit than go into a gambling.

Trading on Dubai World Worries

Last week, in my "S&P 500 Advance/Decline" post (on November 21, 2009), I mentioned about very low Advance/Decline quotes readings on the S&P 500 which signaled oversold stock market sentiment. I have pointed to the higher odds of the up move at that time. The indexes (S&P 500, Nasdaq 100 and DJI) indeed reacted on that oversold signals by the strong up-move on November 23, 2009. However, this gain was shadowed by the "Dubai World financial worries" that hit the market and pushed it strongly down on November 27, 2009.

I would say that on my opinion, there are two good and two bad things about this sharp drop down. The Friday's decline at the market open is one of the strongest declines within a single session since the end of recession (March 2009). This is the first bad thing - it shows us that the stock market is on the stage when it could become unstable very easily and that the sentiment among investors is not as bullish as it was 6 months ago. Actually, it confirms my conclusion expressed in the "Long-Term Technical Analysis" post on November 17, 2009 that the stock market is not the same as it was 6 month ago.

Strong decline on November 19, then strong advance on November 23 and then strong decline on November 27, 2009 - all of that suggest an increase in the volatility and that is not very good (second bad thing). If you take a look at volatility indicators (VIX index, ATR, Standard Deviation, etc) you will see that the volatility is still at low level which is good. Yet, should volatility continue to increase we could face a possibility of a correction down.

The first good thing is that the indexes have been very little time at their lowest level on Friday 27, 2009. The Nasdaq 100 index started to move up on the second minute of trading, the S&P 500 index reversed up after only 2 minutes of decline and DJI index has started to recover in ten minutes after the market opened. It looks like (it is an assumption only) on Thursday November 26, 2008 (when the "Dubai worries" started to spread out) a lot of bullish traders (investors) who were in long position have placed stop-loss orders, those of bullish traders who were in cash have canceled their buy orders and bearish traders placed sell orders. After the market open on Friday, it took about 10 minutes to satisfy demands of all traders who were in panic (who placed stop-loss order and who placed sell short order) and execute their orders. Then, those bullish traders who were in cash and decided to cancel "Buy Long" orders on Thursday, on Friday's morning were attracted by low barging price and started to buy by overbuying "bearish traders in panic" and by pushing stock market up. If the first bad thing is that we have big group of investors whose sentiment is unstable and who could push market down, the first good thing is that we still have a lot of traders (investors) who is looking for a good bargain price to buy.

The second good thing is that during the recovery on Friday we had very strong volume, especially taking into account short trading session. I would say it could tell us that the number of investors trying to buy at low is quite big.

Overall, the stock market is in sideway trading since November 11, 2009 - it is very clearly could be seen on the S&P 500 chart. The upper sideway trading line is going through the highs on November 16, 23 and 25 and the lower sideway line goes through lows on November 13, 19, 20 and 27. By not going deeply into technical analysis a conservative trader may say: let's wait when one of this line is broken and stock market trend is defined more clearly.

In general I'm still slightly bullish by the following 3 reasons:
 - over the last 2 week we had 3 times very low oversold advance decline readings;
 - volatility is still low, yet it very close to the the dangerous level;
 - on Friday the indexes have break lower line of sideway trading, yet they climbed back above it very fast and did not continued to decline.

Despite the fact that I'm slightly bullish the danger of a strong move down is quite big...

S&P 500 Advance/Decline

Last week in my "Technical Analysis" post on November 15, 2009 I have expressed a possibility of a correction down. Yet, at the same time, I have mentioned that I would not wait for a strong move down, but rather for a short-term decline. Now, after 3-day decline on November 18-20, 2009 we may say that we had a shallow decline: the Dow Jones Industrial is 1.1% down from its high, the S&P 500 is 1.7% down and the Nasdaq 100 dropped for 2.6%.

I think that this is a time to check the index charts again to see if the current decline may grow into a bigger and stronger correction. Last week I brought to attention two points that would suggest only a short-term correction: a) absence of bullish volume surges during the November 2-13, 2009 up-move; b) low volatility. Taking look at the same indicators one week later, I may say that we still have not seen any high volume during the price advance (MVO remains at zero), and in addition, even the last three day of negative trading did not bring any increase into volatility (ATR and VIX index remain at the same levels they were a week ago). So, these two factors would still suggest that the current correction should be a short-lived only.

Now, taking a look at other indicators I may say that technical analysis is mostly bearish: SBV is flat and negative, Advance/Decline Oscillator and McClellan Oscillator are at low negative levels, Stochastics is below 20. All of that would suggest higher odds of further decline. There are still a few positive signals: RSI just crossed 30 line on its way up and MACD is close to move from negative into positive area. The other positive sign is high volume during the price decline on November 20, 2009 (see red MVO), yet it is difficult to say that this was a strong bearish volume. Overall, technical analysis is bearish at this moment.

Despite the fact that technical analysis is bearish I would still stay on the same note I was a week ago - current decline may not be a strong. Furthermore, I would not bet on short trading. One more factor that gives me more confidence in not believing in strong decline is very low advance/decline quotes on the S&P 500 on November 19, 2009. I have already mentioned in my "Advance/Decline" post on November 1, 2009 the importance of the S&P 500 advance/decline issues and volume quotes monitoring. The low advance/decline readings in the S&P 500 index suggests strongly oversold condition that usually could be seen before a reversal up (unless it is a recession or stock market crash). We had low advance/decline quotes on October 28 and 30, 2009 and strong up-move after that. At that time, on November 1, 2009 I pointed to good odds of the up move. The same is now, because of the very low Advance/Decline quotes reading in the S&P 500 sector on November 19, 2009 I would consider that the odds are good that up-move may be resumed in near future.

I am sorry I have not brought chart snapshoot this time. You may see the chart setting I usually use and indicators I mentioned above in my "S&P 500 Chart" post. I would highly recommend checking charts and quotes by yourself before relaying on anything I say.

Long-Term Technical Analysis

As was promised in my previous "Simple Trading Strategy" post, I am bringing to your attention some points from my personal longer-term technical analysis.

Various techniques are used to analyze the stock market long-term trend. Some analysts focus on 5-year to 10-year charts, others focus on economic factors, etc. I would like to draw your attention to the interesting on my opinion fact that could be seen on daily charts (1 bar = 1 hour).

In the S&P 500 chart below (the Nasdaq 100 and DJI charts are very similar to the S&P 500 chart), you can see that the stock market has been in a recovery movement since the first half of March, 2009. This is when the "2008 Stock Market Crash" ended. Since then, the stock market has been in a steady upward movement, interrupted by shallow corrections from time to time. If you take a look at these corrections, you will see that the further from the bottom indexes (S&P 500, Nasdaq 100, DJI and other indexes) are, the smaller are the overbought signals that are required to push the stock market into a downward correction. You can see that this divergence between price's new highs and technical indicators (price makes new highs, but smaller, overbought indicators signal a correction) on the S&P 500 chart below on SBV, Stochastics and RSI. I think that you may find the same tendency with other technical indicators as well.

The S&P 500 Chart with elements of longer-term technical analysis

Such divergence between price and technical indicators is nothing new in technical analysis. You can see something similar more often in smaller timeframes. It usually can be seen before a stronger change in a market trend. That means that the stock market is not the same as it was six months ago when a majority of shorter-term, overbought signals were ignored, while indexes continued their rally. I am not saying that the market will crash tomorrow - not at all. The indexes and the market may continue to move up. What I want to say is that the market may become predisposed to a change in its behavior.

If this divergence between new price highs and technical indicators continues to develop in the same direction, there could be several possible scenarios: we may face a stronger downward correction than we saw and then the recovery may continue; we may go into a sideways market like we were in during 2004 after a strong recovery in 2003 that followed the 2000-2003 stock market crash; we may fall into a slow depression like there was after 1929 crash; or there could be something new.

There is still another possible development. In the same S&P 500 chart above, you can see that we had two waves of divergence between price and indicators where the second wave was smaller (less Bullish) than the first one. There is a possibility that a third wave of divergence might develop that could be smaller than the second one.

Another factor that could support the above-mentioned possibility of changes in stock market sentiment is timing. It soon will be a year since the recovery began. That means that the period of "expectation beating reports" could be over very soon. During the crash in 2008, many public companies reported losses and, by the end of 2008, everyone had lowered their expectations. Furthermore, in 2009 everyone has had "expectation beating" reports that have attracted investors and money into the market and which feed the recovery. How many companies do you think will report an "expectation beating" increase in profit in 2010 in comparison to 2009? If not many, other economic factors (unemployment, sales, GDP, borrowed money from China, etc) may begin to play roles in the market's direction.

I don't want to dig deeply into a fundamental analysis of the economy and economic factors that move the long-term market. I just want to say that I see some predisposition to changes in long-term market sentiment and market behavior. Since I am not a long-term trader, I am not going to attempt to predict where the market will be in six months. What I'm trying to define right now is where the market may continue its move. Will it move up by going into a third wave of divergence or will it begin to change its trend direction? I think it could become clear by simply monitoring higher-timeframe index charts within the next couple of weeks.

What affects me is how the market reacts to the overbought and oversold signals and how I should adjust my trading strategy in order to avoid encountering an unpleasant situation. If I see that the market starts to react differently to trading signals generated by my technical analysis (my trading system), I usually take a look at longer-term index charts to see the general market stage. Right now, I am looking a little ahead. The indexes (S&P 500, Nasdaq 100, DJI and other) still move up more easily then dropping down and we still may see new highs and further upward movement. Yet, from a prospective of my technical analysis, I see that we are in a period in which the stock market could become predisposed to changes in the long-term trend.

Simple Trading Strategy

A few weeks ago I promised to take a look at the longer-term charts and longer-term technical analysis. I think it's time to check the general stock market trend. It is my strong believe that a trader, no matter what he/she trades, has time on time to apply technical analysis to the longer-term index charts (Dow Jones Industrials, S&P 500, Nasdaq100 charts) and to evaluate the current stock market stage in order to adjust or change used trading strategy.

A trader can develop and have permanent trading system (set of technical indicators and rules that generates trading signals). Yet, if a strategy of using this system is not adjusted to the general stock market stage then, no matter how good a trading system is, this trader risks to face the system failure sooner or later. The stock market is a live creature. It is in the constant move, it is in the constant change and it is in the constant adapting to the new trading rules, to the new generations of traders, new values of the society, etc. If you are looking for some "Golden Trading System" that require no studying, no monitoring, no work, but just sitting on the couch and calculating a profit then instead of becoming a trader you should spend your money on beer and recreations - at least you receive emotional satisfaction.

There are several examples of simple trading strategies that adjust a system to the longer-term stock market trend. I just want to mention a few of them as a reference to my point of importance of longer-term technical analysis.

Simple Trading Strategy Example #1:

If the longer-term trend could be defined as an up-trend then the strategy of using trading system can put more weighting on "Buy" signals:

• ignore weak "Sell" signals and trade only strong and confirmed "Sell" signals to open a short position;
• trade all "Buy" signals, including the weak ones;
• have a tighter stop-loss strategy when short trade is opened;

Controversially, when the longer-term trend could be defined as a down-trend a trading strategy of using a system could be emphasized on using "Sell"’ signals

• ignore weak "Buy" signals and trade only strong and confirmed "Buy" signals to open a long position;
•  trade all "Sell" signals, including the weak ones;
•  have a tighter stop-loss strategy when long trade is opened;

If the results of the analysis show that the stock market is in a sideway move then a trader may apply equal weighting to "Buy" and "Sell" signals – treat them in the same way.

Simple Trading Strategy Example #2:
(even simpler than the previous strategy)

Stop trading and stay in cash when the longer-term stock market trend could be defined as down-trend and go back in to the stock market when the stock market is in the up-trend.

Selection of a trading strategy depends on what you trade, how you trade (how many trades you made) and how much you trade (how much you invest into a trade). It is essential time on tine to take a look on the general market picture and see where the longer-term trend is going. If you have longer-term technical analysis behind your trading strategy then the odds your trading system is successful are much higher.

In my next post I'll try to show my personal view on the longer-term technical analysis with a reference to theS&P 500 chart.

Technical Analysis

In my last "Trading Strategy" post on November 8, 2009 I have mentioned a possibility of the indexes (Nasdaq 100, S&P 500, DJI, etc) stacking in a sideway action at their October's high levels. The next day, on Monday November 9, 2009 we still had a strong advance and since then the rest of the week we may see that the indexes have been trading mainly sideway (see the S&P 500 chart below): the S&P 500 index exactly at its October's high levels, the Nasdaq 100 index a few points higher and the DJI index has made new 13-month high.

The S&P 500 Chart with elements of technical analysis:
Selling/Buying Volume Oscillator, Advance/Decline Oscillator, MarketVolume Oscillator,
MACD, RSI, Stochastics, McClellan Oscillator, Average True Range in Percents.

In technical analysis it is common to take a look at the history, and from the history you may see that in majority cases sideway trading at new high level ends with a correctional move down. As a rule during this sideway trading you may see strong bearish signals. If you take a look at the chart (S&P 500 chart above) you would see that on Thursday, November 12, 2009 all technical indicators (except volatility indicators) have generated strongly bearish signals. Yet, on the next trading day (Friday, November 13, 2009) the indexes bounced up from their lower level of the sideway corridor (see the same chart above).

Last week I mentioned: "At that time (in September and October) the indexes have been moving sideways for several trading days … we may see some sideway action at this level again ... If the market starts to move sideways the odds are high that the technical indicators will become bearish." That is what we saw on charts: sideway move and bearish signals on Thursday. However, in the same post I have brought some reasons why I would not consider these bearish indications as strong signals, and why I would rather consider waiting. There were two main reasons why I would avoid trading short at that moment: a) no high volume during the up-move and b) no increase in volatility.

Absence, of high volume during up-move indicates that this up-move was not strong enough to generate greedy buying when investors start to rush into the stock market with the hope to jump into "the last wagon of the running train" - as a rule such action leads to a misbalanced in the supply/demands and at least to the short-term correction down. Absence of increase in volatility indicates that the current sideway move did not generated any panic among traders which suggest there were no increase in the number of bearish traders as well. These two reasons kept me last week from trading short, and the same two reasons still keep me out of it.

Right now technical indicator on the major index charts (S&P 500, DJI and Nasdaq 100 charts) are mixed. You may see Bullish indicators as well as some indicators remain bearish:

 - SBV (Selling Buying Volume) Oscillator is moving sideways at this moment which is a neutral sign. Yet, the bullish volume (accumulated since November 4, 2009) still could be considered as a force which is strong enough to push the stock market down into a correction.

 - The absence of the Bullish volume surges (no green MVO) suggests the higher odds of further up move.

 - The advance/decline oscillator is almost flat, yet, it moves up from its most recent low which could be considered as modestly bullish signal.

 - The same as A/D Oscillator, MACD is almost flat, yet, it is moving up from its recent low which is bullish sign, on the other hand it is still in the negative area which could be considered as bearish sign. Overall, MACD could be considered bearish with tendency to become Bullish.

 - General RSI direction is down and this is bearish sign in technical analysis.

 - General Stochastics direction is up and this is a bullish sign in technical analysis.

-  McClellan Oscillator is still in the negative territory which is bullish, yet, it is very close to cross the center (zero) line which in technical analysis is considered as a "Buy" signal.

 - ATR remains on the same level and this is very nice indication (as already mentioned above) of bullish sentiment."

Overall, I would consider technical analysis mixed at this point of time. There is still an existence of a danger of a correction down. At the same time, some technical indicators push me to believe that even if we see a correction it should not be a very strong move down, unless I see at least changes in volatility sentiment (increase in volatility). At the same time indication of resuming of up-move are not strong enough to be strongly Bullish.

I am not stating that I am always right, and that my technical analysis is perfect. I am just trying to share my thoughts about current stock market sentiment and possible development of a future market trend. It helps me to put my thoughts in the order and I hope it may help somebody in avoiding a mistake that can become "financial suicidal". I would rather recommend doing your own technical analysis and checking all my statements by yourself before even considering to follow them.

Trading Strategy

Those who follow my blog should remember what I said a week ago in the "Advance/Decline" post on November 1, 2009: "Yes, if we take a look at major technical indicators (beside volume and advance/decline) we will see that almost all of them are bearish and suggest the higher odds of further decline. However, I would not be very sure in this and personally I do not hold any short position right now. Yes, we still may see some decline, however based on my experience working with volume and advance/decline data I would consider possibility of coming reversal and I would monitor index charts more closely for bullish signals that may confirm my analysis."

Now, you may see that indeed extremely low advance decline readings in the S&P 500 index indicate coming reversal and uptrend. If you take look at the hourly index charts (S&P 500, Nasdaq 100 and DJI) you will see that already on Monday November 2, 2008 by the end of the trading session MACD and Stochastics have became Bullish, shortly after the market open on November 3, 2009 Advance/Decline Ratio and RSI became Bullish and by the end of the trading session on the same day McClellan Oscillator and SBV Oscillator indicated Bullish sentiment.

Strong up move during the rest of the week has pushed S&P 500 and Nasdaq 100 indexes to their high levels on September 17-23, 2009 and DJI index to its high on October 16-22, 2009. At that time (in September and October) the indexes have been moving sideways for several trading days. Furthermore, I would say that we may see some sideway action at this level again. Actually, we already started to see slowdown in the recent rally up and some of the technical indicators started to show tendency to become bearish. If the market starts to move sideways the odds are high that the technical indicators will become bearish. However, personally, if this is a case and technical analysis starts to generate bearish trading signals I would not wait for a strong correction. There are several main reasons why:

 - The recent correction has generated high volume surges at its support level, yet we have not seen any increase in volume during the resent recovery. Furthermore, I may say that the recent recovery did not generated waves of greedy buying which could change a supply/demand balance.

 - The market becomes less volatile which could be clearly seen on the VIX index (volatility index) decline. As a rule a decline in volatility suggest that the market becomes more stable and higher odds of up-move.

 - During the recent decline we saw twice the S&P 500 hitting extremely low advance/decline readings (on October 28 and October 30, 2009). This suggests that the marker became strongly oversold at its support level. So far I do not see any indication of market becoming overbought.

Overall I would say, yes, if technical analysis starts to generate bearish signals we may see some sideway move and even a correction; however I would not consider the bearish trading signals as a reason to open a short trade in the current market stage. One of the conservative and safe trading strategy when the longer-term trend could be defined as bullish could be described in two simple rules:

Rule #1: Open a long trade when you see Bullish signals;

Rule #2: Stay in cash and wait for Bullish signals when you see Bearish signals.

Advance/Decline

In my previous "Advance/Decline and Volume" post on October 26, 2009 I have expressed that from the point of my personal technical analysis I see a dominance of Bearish market which was confirmed by decline on the stock market during this week. In the same post I have mentioned that I do not know when to expect a reversal, yet, I have pointed that I would monitor indexes (Nasdaq 100, DJI and S&P 500) for high volume surges during the price decline and the S&P 500 index for low advance/decline readings.

Actually we had very low advance/decline volume and issues ratio reading on the S&P 500 index on October 28, 2009. However on that day the critically low Advance/Decline readings were not supported by high volume. Still we had strong bounce on the next day (on October 29, 2009), which looked very promising, yet on Friday October 30, 2009 we had record decline again.

October 30, 2009 is an interesting day. On that day we had high volume on all major indexes and advance/decline volume and issue ratios have dropped to critically low readings again. (You may see the S&P 500 index advance/decline reading at
http://www.marketvolume.com/quotes/advance_decline_sentiment.asp?s=SPX). These two factors suggest that there is a possibility that the market become oversold. In this case volume and advance/decline indicators perform as leading (trend-predicting) indicators that suggest a possibility of a reversal. Yes, if we take a look at major technical indicators (beside volume and advance/decline) we will see that almost all of them are bearish and suggest the higher odds of further decline. However, I would not be very sure in this and personally I do not hold any short position right now. Yes, we still may see some decline, however based on my experience working with volume and advance/decline data I would consider possibility of coming reversal and I would monitor index charts more closely for bullish signals that may confirm my analysis.

As a rule the indexes always react on high volume and low advance/decline data during the price decline by a reversal. There could be occurrences when it could be ignored, however it usually happens during the longer-term recessions or during the stock market crashes. I do not think that the logger-term market is in any of those stages right now. Furthermore, despite bearish signals on many indicators I would rather stay in cash and wait for some bullish signals that may confirm my analysis.

In one of my next post I will try to show my thoughts about longer-term trend. I think, now, the stock market is not the same as it was six month ago and I think it could be interesting to take a look at longer-term index charts (S&P 500, DJI and Nasdaq 100 charts) to see the general tendency of the market movement.

Advance/Decline and Volume

It's nice to be right - see my yesterday's "Volatility" post. Yet, the first tree hours of today's trading session were somewhat disturbing. I think every trader has the moments when from one side the logics tells that the market should not go that way (in my case it should not go up) and from other side there are emotions that it goes in opposite to the expectetions way anyway. I believe many of those who read my blog yesterday were somewhat skeptical during these first three hours. Yet, by the end of the session I think the points mentioned in my last two posts should make some sense.

I understand that sometimes it is difficult (especially if you are reading this first time) to follow my my technical analysis, especially when I do not post a chart snapshoot. As a rule I always use a set of technical indicators you may see in the "S&P 500 Chart" post. You may always get the same chart atwww.marketvolume.com. I'm not telling that you have to rely on the results of my technical analysis or follow my steps precisely. Every trader has to do analysis by him/herself. I'm just trying to share some of my experience in the analysis and if somebody can learn something from this it makes me happy.

Just a few thing that I would like to drag your attention to. The market is down and the sentiment becomes more bearish. During the today's decline in period from 11:30 until 12:00 EST we saw a big volume spike. As a rule volume spike during the price decline means panic selling and could reverse the trend up, yet it was not the case. It is a bearish sign when the indexes ignore volume spikes to the price downside. Another bearish point is the further increase in the volatility.

If we are in a correction  and you ask me when we may expect to be back in uptrend I will answer "I do not know". I may only say let's watch the charts - we may see reversal tomorrow we may see it in a week. In particular I would be paying more attention now to the volume surges (low negative MVO) on the Nasdaq 100, S&P 500 and DJI and advance/decline issues and volume ratios on the S&P 500.

Volatility

It looks like a conclusion I expressed in the last paragraph of my previous week's post (see "Technical Analysis" on 10/18/2009)" was correct call. Now, we may say that starting from the middle of October 14, 2009 the market has been trading in the sideway corridor. We may draw the upper line of this corridor trough the October 19, 21, 22 highs and the lower line of this corridor would be placed through the lows on October 16, 22 and 23. Three times the indexes (S&P 500, Nasdaq 100 and DJI) have bounced down from the upper line of this resistance corridor and now this is the third time when the indexes have come close to the lower. I think if the lower line of this corridor is broken then we may officially say that the stock market is in a correctional move down.

It is worth mentioning that over the last week we saw increase in volatility which could be considered as a Bullish sign. As a rule, lower volatility could be witnessed during up-trends and down-trends are accompanied by higher volatility. Over the last one and a half week we have several signals to go short, yet, they were not confirmed by an increase in volatility.

I mentioned in my previous post "it could be a good conservative trading strategy to wait in cash for stronger bearish signals". Now, if we take a look at hourly index charts we may see negative signals again, and this time the bearish signals are confirmed by an increase in the price volatility. Because of that I would say that at the end of this week the odds of the correction down are higher than they were last week (on October 16, 2009) when the indexes at the same level they are now.

Still, the technical analysis is not an exact science and the results of the technical analysis do not guarantee the market direction. The only thing I may recommend is to monitor charts. Personally I consider that an accurate analysis of several technical indicators should help any investors and every investor should have in his/her arsenal at least three technical indicators: 1) price based, 2) volume or advance/decline based and 3) one of volatility indicators. Maybe 50 years ago investors could rely on a single indicator in their analysis. Yet, the current market is not the same as it was before and you may not rely on a daily MACD only (or any other single indicator).

Technical Analysis

A week, ago in my "S&P 500" post on October 11, 2009 I have highlighted September's resistance level and pointed to the dominance of the Bullish signal with possibility of breaking the September's high levels. As a confirmation of my technical analysis applied to the hourly charts, this week we saw further advance on the S&P 500 and DJI indexes. The Nasdaq 100 index was positive during this week as well, yet, it stuck mostly in sideway action around its September's highs.

Right now, we have a little bit different picture on the hourly index charts. Last Sunday my main bullish point was the absence of a high volume during the up-move: "we have not been seen any highlighted trading activity (volume surge), which may shift supply /demand balance, during the recent up-move. Because of that I would say that there are good odds we may see indexes breaking September’s highs". On October 14 - 15, 2009 we had high volume on all major indexes including the Nasdaq 100, DJI and S&P 500. Even this volume surge was not very high I do not think we should disregard its appearance. As a rule volume based technical studies belong to the group of the leading technical indicators and they could be used to predict future possible trend reversals. A volume surge does not imply an immediate change in a trend, yet, it indicates a market condition predisposed to possible changes. Now, I think we may analyze lagging indicators more tightly for a confirmation of a possible correction down.

Taking look at the same set of technical indicators I traditionally use (see the chart in my previous post) I may say that my technical analysis is not bullish at this time. Majority of the indicators are bearish and suggest possibility of the further slide which has started on Friday October 16, 2009. In particular:

1. The SBV Oscillator declines and shows big Bullish volume accumulation which indicate overbought market.

2. As I mentioned above we had high volume on October 14/15, 2009 which is confirmed by the MVO (check its high positive readings).

3.MACD is flat and could be considered neutral.

4. The advance/decline oscillator is in decline by pointing that the traders are focused more on the declining stocks.

5. Stochastics and RSI are bearish as well – they decline and are close to their low levels.

6. The McClellan Oscillator moves below zero line which is considered as a bearish sign.

As I see, may charts and the technical analysis are better-disposed to favor a correction down. The only point against a correction is that taking look at history I have not seen a lot of occurrences of reversal down without a side-way trading at resistance. Second factor that could make a trader cautious is that we do not see an increase in volatility – as a rule when market drops volatility goes up. We see some light ATR (Average True Range) move up, yet, VIX volatility index is moving down. Because of that I would say that despite the bearish technical analysis, It would be nice to see more sideway trading before a correction down. In current longer-term Bullish market I think it could be a good conservative trading strategy to wait in cash for stronger bearish signals and maybe even to miss a short trade than to jump into a short position when you do not have certain degree of confidence.

S&P 500 Chart

Nice week - As I mentioned in my previous "Advance/Decline Signal" post on October 4, 2009 "there are some strong signals of a possible reversal and, personally, I would more closely watch charts over the next couple of days and I would consider that it could be too risky to be in a short position without tighter stop-loss at this time." those indicators that were bearish on February 2, 2009 became bullish on Monday February 5, 2009 and we had further recovery from the correction for the rest of the week.

Now, the main US indexes (S&P 500, Dow Jones Industrials and Nasdaq 100) are at September 17-23 high levels. Since index stuck for a week at these levels in September there is a possibility that we may see some sideway trading or a decline again. However, if we take a look at technical analysis of the same indicators we would see that only Advance/Decline Oscillator, McClellan Oscillator and MACD point to the Bearish sentiment and possibility of a decline. The rest of technical studies show shorter-term oversold stage, yet remain bullish or neutral by pointing higher odds of further up-move.

On mine opinion the most bullish signal for me is an absence of high volume during the recent up-move. We may see strong bearish volume surge on October 1-2, 2009 and this volume surge could be considered as a critical in the resent reversal. However, we have not been seen any highlighted trading activity (volume surge), which may shift supply /demand balance, during the recent up-move. Because of that I would say that there are good odds we may see indexes breaking September’s highs, yet as I mentioned before that we may see some sideway trading and even a decline before that.

Overall, I would say that my technical analysis of hourly charts (1 bar = 1 hour) does not have any leading indicators that would signal a possible downturn. However, I would not recommend rely on my words. What I would recommend is to check chart by yourself: what looks bullish today could become bearish tomorrow.

The S&P 500 Chart with elements of technical analysis.

Advance/Decline Signal

Last week, on September 30, 2009 in my "Short Analysis" post I have pointed to the increased volatility as a bearish sign. The next two days after that (October  1-2) the market (indexes) had declined.

Right now taking a look at the same set of technical indicators on the hourly S&P 500 chart (Nasdaq 100 and DJI charts are similar to the S&P 500 chart) I may say that right now, the technical analysis shows the dominance of the bearish sentiment on the market:
- The SBV Oscillator is at low negative level and this is a bearish sign. Yet, it stopped declining and it moves sideway which may point to a possibility of coming changes in the trend in a near future;
- The Advance/Decline Oscillator at low negative level which suggest the dominance of bearish traders, yet, we may see that it started to move up, which suggest that bullish traders slowly started to enter the market.
- RSI is clearly negative – it just declined below 30.
- Stochastics is negative as well, yet it has been under 20 line for 2 trading sessions which would suggest some oversold condition.
- McClellan Oscillator is negative - it is still in the red territory.

As you may see the technical analysis is not a bullish at this moment and would suggest the higher odds of further slide. On the other hand we had some strong positive leading signals that suggest a possibility of coming reversal:
1.We may see very strong bearish volume surge during the decline on October 1, 2009 (see MVO) which would point to the panic selling. On the next day on October 2, 2009 we had normal trading volume and that point that the panic selling could be over and we may see a reversal.
2. We saw very strong oversold Advance/Decline signals on the main indexes (NYSE, S&P 500, DJI and Nasdaq 100) on October 1, 2009. As a rule, such low Advance/Decline readings lead to a reversal.
3. We may see some decline in volatility which is a positive indication.

Overall I would say the may technical analysis results are bearish, yet, there are some strong signals of a possible reversal and, personally, I would more closely watch charts over the next couple of days and I would consider that it could be too risky to be in a short position without tighter stop-loss at this time.

I will try to post a chart next time. Meanwhile you may check the chart setting I use in my previous posts.

Short Analysis

I have missed my Sunday post, therefore I'm writing during the week. Coming back to my previous "S&P 500 Technical Analysis" post on September 20, 2009 I may say that since then we have had the market (Nasdaq 100, S&P 500 and DJI indexes) moved as was predicted: sideway trading first (from September 21 until noon on September 23) and then a correction down.

Looking at the price movement it looks like the correction down is coming to the end – the indexes are moving up from their September 25 lows. However, taking a look at technical indicators I do not think that many traders see positive and promising signals. Right now my technical analysis on hourly charts shows following:

1. SBV (Selling Buying Volume) – bullish on the Nasdaq 100 and DJI and neutral on the S&P 500;
2. MVO (MarketVolume Oscillator) – the same as SBV bullish on the Nasdaq 100 and DJI and neutral on the S&P 500;
3. Advance/Decline Oscillator could be considered Bearish, yet close to the oversold levels on all main indexes (Nasdaq 100, S&P 500 and DJI);
4. MACD is neutral by moving basically sideway;
5. RSI and Stochastics reading are mixed, yet, I would say that they are more Bearish than Bullish;
6. McClellan Oscillator started to decline, yet, it is still positive.

As you may see the technical analysis is mixed at this moment and may suggest recovery from the correction as well as further developing of a deeper correction. The main point that makes me worry, despite positive volume signals, is that volatility is increasing. You may see that ATR (Average True Range) and VIX index are climbing up and this is a bearish sign.

As a rule in case like we have now (mixed technical analysis results) a good decision could be waiting for more clear signals. Right now the indexes clearly defined the resistance line: for S&P 500 and DJI indexes high levels on September 17, 18, 22 and 23 and for Nasdaq 100 high on September 23. At the same time we may draw some support line that would go through September 25’s low. Furthermore, conservative way could be waiting for indexes breaking one of these lines and checking the technical analysis at that point.

S&P 500 Technical Analysis

A week ago in my "Technical Analysis" post on Sunday September 13, 2009 I have pointed to a bearish sentiment and overbought signals on majority of technical studies. However, in the same post I mentioned: "As a rule, when market comes to some overbought level it is stuck at this level for a couple of trading sessions and moves side-way before a decline." As you may see the history analysis helps in making a correct decision not rushing into a short trade even in situation when technical analysis is in favor of a correction. In one trading session, on Thursday September 15, 2009 the stock was back in the up-trend. On that day (September 15), all technical indicators on the Nasdaq 100, S&P 500 and DJI turned from bearish into bullish.

Now, by the end of this week we have a similar picture. Again, many of technical studies on the Nasdaq 100, S&P 500 and DJI charts point to overbought (short-term) levels and bearish sentiment. And again, I would recommend taking look through the history of these indexes. You should see that in the resistance (before a correction) we have a few sessions of sideway trading. In opposite an exit from a support is sharp and strong. This is not a 100% rule, yet, I would say that the odds of having a sideways trading in resistance are quite high.

The last two weeks’ rally up (from September 3, 2009) has push the stock market and indexes into overbought condition ( for a short term at least). A correction down would be healthy for the market. However, a possibility of sideway trading still exists and personally I would watch the Nasdaq 100, S&P 500 and DJI indexes for stronger bearish signals.

Right now the technical analysis applied to hourly charts shows following:

1. High volume surge on September 15-16, 2009 during the price advance (see big green MVO) suggests a possibility of reversal down.
2.  The RSI (Relative Strength Index) and Stochastics have dropped below 70 and 80 lines respectfully and both these indicators are in decline which is a bearish sign.
3.  The Advance/Decline Oscillator declines and is close to the center (zero) line. This could be considered as a bearish signal as well.
4. The MACD moves up, yet, this move is almost flat. Even this indicator is bullish, it’s not a strong signal and it could turn into bearish signal very easily.
5. The SBV Oscillator declines slowly which indicates bearishness, yet, it is still has high positive readings. It would be nice to see it dropping closer to zero line before considering it as a strong bearish signal.
6.  McClellan Oscillator is neutral on the Nasdaq 100 and S&P 500 indexes - it moves flat at a zero line. However, McClellan Oscillator applied to the DJI index is positive (above zero line and in flat move).
   

The S&P 500 Chart with elements of technical analysis.

Stop-Loss Trading Strategy

Many traders face a question what strategy to use in order to protect portfolio from big losses. In most cases this question is narrowed to a selection of a stop-loss strategy. A stop-loss strategy choice is very important, yet, is very confusing and can put even an experienced trader in a corner. The problem is that there is no straight answer on what system to use. A stop-loss selection completely depends on a selected trading vehicle, a personal trading style, risk tolerance, invested money and in addition it depends on the stock market itself.

I will try to go through some of the factors that may affect the stop-loss strategy.

1. Selected Trading Vehicle: Depending on what you trade, a stop-loss would be different. If you are buying and selling stocks 2-5% stop-loss could be sufficient for your trading system. However if you are buying options then 2-5% stop level could be hit very easily and you could be willing to look for 20-50% stop-level. If you trade uncovered options you could even think about setting stop-loss above 100% of the premium received. Even if you are trading stocks the stop-loss level could greatly differ from stock to stock. More volatile stocks would require bigger-stop-loss than the less volatile stocks.

2. Personal Trading Style: There are different trading system and different trading styles. Some traders are buying equities for long-term investments of pension funds and they make one trade per one-two years. These traders could be ready to set stop-loss to 10% and above. On the other hand a short-term trader who makes 5 trades per week may not be willing to risk setting stop-loss bigger than 1%.

3. Risk Tolerance: Twenty years old trader may lose everything and he/she still will have time to make some money and come back to trading and investing. However if you are close to retirement you should know the edge when it is better to get out of a game. If you are seventy years old you could be willing to set tighter stop-loss than.

4. Invested Money: If you have only $2,200 on your account and you invest all of them on margin ($4,400) in one trade, your stop-loss should be below 5%. Otherwise you risk losing more than $200 in a single trade and you may lose your ability of trading on margin. At the same time a trader who invest a $1,000 into a trade and who has $100K on the account could be ready to lose all 100% of the invested money (all $1,000).

5. Stock Market: The market condition is the most important factor that many traders skip. The market has periods of different volatility. During a steady uptrend, as a rule, the market is less volatile than during a recession and the market is extremely volatile during a stock market crash. It is logical to adjust a stop-loss trading strategy to the market volatility. It is unusual situation when the long-term uptrend (when market is less volatile) to see bigger than 2% DJI index moves within a single session. Furthermore, a short-term DJI trader would be looking for tighter than 2% stop-loss. At the same time, during a recession when market is more volatile the odds are very good for bigger than 2% DJI moves up and down within a single session and the same short-term trader, who is brave enough to trade in volatile market, could be willing to consider less tight stop-loss.

As you see stop-loss selection is not as easy as it seems from the first view. A lot of factors should be considered and there is no straight answer. Each trader has to find it out by him/herself. A trader should not copy any other trader - what works well for one trader does not necessary will be good for another trader. You can and you should look what other traders do, but not mimic them. If you decided to use somebody's style, learn it first and then use your knowledge to build your own trading strategy or adjust existing one to you personal trading needs. Do your own homework and do not think that your trading system is invincible and you will never have a negative trade.

Technical Analysis

Nice week. As all indicators were bullish last Friday (see my last week "Volatility" post on September 6, 2009) the stock market rallied up strongly. Now taking look at hourly charts we may see that majority of the technical indicators started to show some bearish signs:

- McClellan Oscillator declined below zero line - bearish sign;
- Stochastics and RSI dropped below 80 and 70 lines respectfully - bearish sign;
- MACD declines - bearish sign;
- Advance/Decline Oscillator declines - bearish sign;

I think closed attention should be paid to the high MVO on September 8-10, 2009. This indicates high volume activity during the price advance. As a rule such high volume could reverse a trend and we already saw slow down in up-move.

The SBV Oscillator is the only indicator that could be considered slightly bullish. It declines, yet, the SBV reading are still at high positive levels.

Overall, taking a look at technical analysis applied to the hourly charts ( see my previous posts for hourly charts setting) I cannot say that the market is very positive. In opposite, there are many signs that suggest a correction down. However, we have just had a strong rally. Taking look at the history I do not see many occurrences of sharp reversal after such up-move. As a rule, when market comes to some overbought level it is stuck at this level for a couple of trading sessions and moves side-way before a decline.

Volatility

In my previous post on August 30, 2009 ("Swing in Trading")  I have talked a lot about swing at the market open on August 28, 2009 by encouraging everybody to take a look at history to see what usually happens after such spikes in price during a side-way trading. I think, now, those who did not have chance to take a look at history understand what message I wanted to deliver. The massage was that this is important having access to historical charts. Ability to see the past gives you a tool to compare present price movement to the past, find similar patterns and act accordingly. I think the correction down we saw at the first half of this week (after my post) is the best witness of my words.

From my communications with other traders I know that many of them ignore analyzing history. The most popular way of trading is to take the most popular technical studies, apply the most popular setting and use the most popular trading strategies to generate signals. No offence, but personally I call it "gambling". With the same success you may go to casino.

The last person I communicated called himself an "experienced trader" and he was upset that a technical indicator does not work as it is told in the book… Again, no offence, but my answer is bs. This is great that people read books, go to the universities and receive education. However, real life, real job and real trading differ a little bit from what you read in a book and study in the university. Books and university gives you general knowledge and basic tools. However in real life, on real job in real trading you have to adjust what you learned, improve it and learn how to use it on practice. If you do not do it then you always going to be upset that a technical indicator does not work as it is told in the book and blame everything around in bad trading signals.

Most technical indicators were introduced 20-30 years ago, when nobody had access to intraday data and intraday charts. Most of the mentioned in the books setting for technical studies are for daily data and long-term trading. It is not a good idea to use the same indicators setting in intraday trading. It simply does not always work. When you look at 10-year chart you may ignore the market volatility because in 10-year frame you see market decline, market crash, recovery, up-trend, etc. Basically, you see different markets with different volatility in one time-frame. When you dig into intraday charts you cannot ignore volatility. On intraday levels, price trend acts differently in down-trend (high volatility), during the crashes (extremely high volatility), recoveries (middle volatility) and up-trends (low volatility). Respectfully, on intraday level a technical indicator setting should be adjusted in accordance to the market condition.

The simplest way of adjusting a technical indicator to the current market is

1. Find in the history periods with similar to the current market volatility and similar longer-term trend.

2. Find out what indicator setting would work best for you in those periods in history.

3. Try to apply the same indicator setting in current market.

In my understanding, the history is the strongest weapon in the arsenal of a trader and the most important component in technical analysis.

I think, I went out of my weekly posts topic. Coming back to it - see below the S&P 500 chart with the sentiment on technical studies I track. By the end of the week all technical indicators are bullish. The Nasdaq 100 and DJI technical analysis results look the same which is a good sign. There is still a room to the upper sensitive level.

The S&P 500 Chart with elements of technical analysis.

Swing in Trading

The last week of August was flat. The indexes already were in the side-way trend during the first two weeks of August - see the S&P 500 chart in the "S&P 500 Analysis" post on August 16, 2009. Then we had some up-move and again a week of side-way trading.

The indexes did not run far above the corridor I draw in the same post "S&P 500 Analysis" post. The Nasdaq 100 index is moving just above the upper level of the sideway corridor we saw in the beginning of August. The S&P 500 is about 20 points (2%) higher and the Dow Jones Industrial index is about 120 points (1.5% roughly).

It looks like the strong recovery we witnessed in period from August 18 until August 21, 2009 has become exhausted very fast. If by the end of the last week we had positive sentiment on the market (see my "Short Technical Analysis" post on August 23, 2009) then now I would not bet on it. I mentioned a week ago in the same post that if we have flat market we could be considering of a possibility of a stronger correction down as we did it during the first two weeks of August.

Especially what makes me worry is Friday’s trading – on August 28, 2009 we had strong positive opening and then similarly strong decline. If you have access to historical charts I would recommend you scrolling charts back in history for side-way moves and swings above all resistance levels and back down during those side way moves. I could have only one explanation of such move – there were stop-loss orders of Bearish traders just above resistance levels and because stop-loss orders are considered by the market as a demand to buy (to cover short position) the market did not hesitate to hit those levels and fill orders of other Bearish traders who was not in the position and wanted to sell at higher levels. Because the Friday’s strong opening was not supported by Bullish traders, the pressure of Bearish traders pushed the indexes back down. I hope my explanation is not very complicated, just take look at historical charts and check what usually occurs after such swings during a side-way market.

Coming back to the technical indicators on hourly S&P 500, DJI and Nasdaq 100 charts I traditional discuss in my weekly posts, I may say that by the end of the week:

• SBV is neutral – it is flat around central zero line;
•  Advance/Decline oscillator is positive – it advances after hitting low negative levels;
•  MACD is bullish – it moves up and just crossed zero line;
•  RSI and Stochastics are moving up which is positive sign, however they did not hit oversold levels. Furthermore, I would say that these indicators are only slightly bullish;
•  McClellan Oscillator is negative, however it shows some positive sign by starting to move up.

Overall technical analysis of the hourly index charts is positive, however I would not expect strong up-move and would monitor charts for changes in the sentiment.

Short Technical Analysis

Last week on Sunday August 16, 2009 in the "S&P 500 Analysis" post I have discussed the possibility of correction down. We had strong move down during the next 2 days (Monday and Tuesday). However, that was the only decline we had. The rest three days of the week we had strong recovery. It was strange exit from the correction. As a rule an end of a decline should be market by a volume surge, however it did not happened in this case. Still, on Wednesday majority of technical indicators became bullish and on Thursday's mooning all studies you may see on my chart snapshots (see my previous posts) were strongly bullish.

Now, the indexes run over the upper line of the sideway corridor they were in August. For many traders this could signal a beginning of a new possible up-move. As I mentioned before we are in the period when all news and reports are positive simply because the claimed at the end of 2008 expectations for 2009 were purposely lowered in fear of recession continuation. As a result, this positive news could continue to push market higher.

However, this is not my job to analyze news and all other economical factors that drive the U.S. economy. I do technical analysis and I follow technical indicators. If the results of technical analysis suggest up, I say "Up" if technical analysis is bearish I say "Down". In some cases there could be unexpected turns, however, for such occasion w have trend-following technical studies (lagging indicators) and we have higher timeframes that help us to define when it’s time to cut losses.

So, coming back to the charts and technical analysis I may say that by the end of this week the majority of indicators I use are still Bullish:
 - advance/decline oscillator is at high positive levels and is moving up;
 - RSI is above 70;
 - Stochastics is above 80;
 - McClellan Oscillator is almost flat and is at high positive level;
 - SBV Oscillator is positive and is at high levels which is a Bullish sign. However, it started to decline which shows some weakness;
 - MACD started to decline as well, yet it is still positive.

So far the only danger for the further up-move is high MVO on August 19-21, 2009 in the Nasdaq 100 sector and on August 21, 2009 in DJI sector. High MVO indicate high volume activity (volume surge). Volume surge during the price advance indicates greedy buying and strong greedy buying may reverse a trend. However, we do not see high MVO in the S&P 500 sector which is a positive sign.

Overall, my technical analysis suggest higher odds of further recovery, however, I would closely monitor charts over the next week. If I see flat market again I would say we could be back where we were in the first half of August – consideration of a possible strong correction down.

S&P 500 Analysis

It is 3 weeks as I posted a chart in my "S&P 500 Rally Up" post where I pointed to the overbought condition of the market and expressed a possibility of sideway move that may turn into a correction. Since then the Nasdaq 100 and many other indexes have been moving in sideway corridor. The S&P 500 and Dow Jones Industrial (^DJI) indexes pushed by Financial and Housing sector (see my previous week "Financial Sector" post) started their sideway move a week later on August 3, 2009.

Now, when it looks like financial sector is not pushing S&P 500 and DJI indexes up and is not holding the rest of the market in sideway corridor we may ask: "could be expect a correction down?"

There are always two answers in stock market technical analysis: a) market can go up, and b) market can go down. So I decided to summarize a few points that favor those answers  from my prospective.

In favor of up move:

1. In some cases when the market is in sideway corridor for a prolonged period of time it can release itself from the overbought condition it was when it entered the sideway corridor. Furthermore, I would say that the Nasdaq 100 and some other indexes are not as overbought as they were on July 23, 2009. We saw some negative money flow on those indexes and they do not need a strong correction down to resume a recovery.

2. The stock market is far from its crash bottom and we will continue to have good and positive economic reports as we had over the last month. At the end of 2009 the public companies and economists “purposely” have set their expectation levels too low (they expected further crash and weak market). As a result, now, and I think for the prolonged time we will have good economic reports that will "exceed expectations" and these good news may push market, indexes and stocks up.

In favor of down move:

1. I think the stock market is still overbought after its last rally up.

2. The volume surge on August 5-7 in the S&P 500 Financial sector is very big and could mark end of the rally in this sector. The Nasdaq Other Financial index that represents smaller financial companies is already almost 5% down from its top on August 7, 2009.

3. If the “Health Care Reform” gets green light we may see investors pulling money out from the health insurance companies.

There could be other points, yet, coming down to the technical analysis on chart I may say that the sentiment is more Bearish. Majority of technical indicators on S&P 500, DJI and Nasdaq 100 indexes suggest negative trend (see S&P 500 chart below). Still, on the same chart you may see Bullish Stochastics and RSI. I would say, if the indexes break their lower corridor level that would confirm a correction and at this point of time more odds on this side. Yet, if the indexes run above their upper corridor border we may not see a correction at all.

S&P 500 chart with Technical Analysis of SBV, MVO,
Advance/Decline Oscillator, MACD, RSI, Stochastics and McClellan Oscillator

Nasdaq 100 Quotes

I like when the data are presented in user friendly way. See below example that I just found online. Even simple technical indicators could be useful if they are in the easy  to understand and analyze format. Source: NASDAQ 100 Quotes

Moving average sentiment is considered "Bullish" if moving average is above the last sale price of the NASDAQ 100 (^NDX). Respectfully "Bearish" moving average sentiment is read when moving average is below the last sale price of the NASDAQ 100 (^NDX).

NASDAQ 100 (^NDX) Quotes As of Friday, August 14, 2009*   Open High Low Last Change NASDAQ 100 (^NDX) 1623.49 1624.47 1596.95 1611.58 -17.07/1.05% Technical NASDAQ 100 (^NDX) Indicators NASDAQ 100 (^NDX) Simple Moving Average   Last Change Sentiment* 5-day Moving Average 1,612.99 -1.58/0.10% Bearish 20-day Moving Average 1,601.80 4.22/0.26% Bullish 50-day Moving Average 1,519.31 2.38/0.16% Bullish 100-day Moving Average 1,439.63 3.78/0.26% Bullish 200-day Moving Average 1,316.09 1.57/0.11% Bullish NASDAQ 100 (^NDX) Exponential Moving Average   Last Change Sentiment* 5-day Exponential Moving Average 1,615.05 -1.74/0.11% Bearish 20-day Exponential Moving Average 1,589.45 2.33/0.15% Bullish 50-day Exponential Moving Average 1,527.72 3.42/0.22% Bullish 100-day Exponential Moving Average 1,459.99 3.06/0.21% Bullish 200-day Exponential Moving Average 1,459.99 3.06/0.21% Bullish