Sunday, May 31, 2009

Stock Market Crash Stages

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As was mentioned before (see my "Side Way Market in May" post) the indexes continue to move in the corridor defined by May 8, 2099 high and May 13, 2008 low. Now, the indexes are close to the upper edge of this corridor: the Nasdaq 100 index has hit this level yesterday, the S&P 500 is still about 10 points below this level and the Dow Jones Industrial is approximately 70 points below.

Only one nice trading session is needed for S&P 500 and DJI to hit this level and if it is broken it could mean that we may see further move up. However, I consider that the odds of the bounce down again are still good. The stock market (when I mention stock market I assume the main U.S. indexes which associated as market barometers: DJI, S&P 500 and Nasdaq 100) has been in a sideway move only for a month. To see the picture better, I may recommend checking higher timeframe index charts - from 1-year to 7-year views.

From the higher timeframe charts we may see that the stock market has been in recovery for 2 months (from the beginning of March to beginning of May 2009) and the whole May the market was basically flat. By comparing recovery after 2000-2002 stock market crash to the current recovery I may say that:

  • The recent stock market crash was stronger;
  • We had 3 bounces from the bottom in the previous recovery: August 2002, October 2002 and February 2003 (war in Iraq was lunched). We had 3 bounces from the bottom in the recent crash as well: October 2008, November 2008 and February 2009;
  • The first recovery wave in 2003 was 3-month long and then the market was in 2-month flat stage. The current move up was 2-month long and we see market in sideway move for a month only;
  • In 2003, after 2-month of flat stage, the stock market went up again.

To better understand the stock market crash, recovery process and what could be expected next, I would divide the stock market crash into the following stages:

  • Recession: The market is heavily overbought and it starts to move down. As a rule this move down is prolonged in time and this move down is not very scary. See period from July 2007 until May 2008 and period from August 2000 until March 2002. In this period a many investors start to sell, yet there are still investors who buy.
  • Crash: As a rule during the recession the bad stuff about companies and economy is revealed and depending on how bad "the truth" is we have strong or extremely strong panic selling. The recent "discovery of truth" about financial companies' manipulation was much scarier than the "discovery of truth" about internet bubbled companies in 2000-2002. In this period we see panic selling - everybody selling and only small part of investors buy. In this period bad, weak and "fraud" companies go bankruptcy and good companies become under evaluated. This period is short and drop down is strong.
  • After Crash Clean-up: The market still can go down and we may see bounces from the bottom. In this period investor are still selling, yet, the panic is not as strong as it was during the crash. Many investors (professional traders who see under evaluated companies) start buying attracted by low bargain price, yet, the number of Bullish traders is not big enough to reverse the trend. During this period we still may see "bad" companies go bankruptcy, yet, it's not very scary since, usually, it is an expected bankruptcy and many traders are already prepared to that. For this stage I would refer to periods from July 2002 until February 2003 and from and from October 2008 until March 2009.
  • First wave of recovery: There is no panic selling any more. There are still sellers, yet, the number of buyers attracted by low price of good stocks become quite big to move stock market up. Even if we see bankruptcy during this period it will not affect strongly up-trend because all the "bad" companies were already removed from the major indexes. The companies are still under evaluated, yet not as strong and we start to see positive signs in the economy. At the end of this period we may see sideway move or small correction. It could be strong up move in short period of time: see periods from March 2003 until June 2003 and from March 2009 until May 2009.

As I understand (I could be wrong), we are at the end of the "First wave of recovery" and we still may see side-way market or even some drop down (automotive clouds are still on the "stock market sky").

In my next post I'll go back to the shorter term index charts (S&P 500, DJI and Nasdaq 100 charts) to show what my technical analysis tells about shorter-term trends and current market sentiment.

Wednesday, May 27, 2009

Sideway Market in May

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Just a quick and short follow up after my "S&P 500 Chart" post on May 24, 2009. I was somewhat bearish, yet we had strong up move yesterday based on the economic data (see "Economic Calendar" I have mentioned about sensitive levels at the May 13, 15 and 21 lows (see lower blue line in my previous post) and we had bounce up. Today we had a decline again and, now the S&P 500 bounced down from the top sensitive level (see top blue line in my previous post). The indexes has become a little bit more volatile over the past few sessions which mean more close attention should be given to the intraday charts or more conservative approach could be taken to stay in cash until a trend is defined more clearly. The market has been flat since beginning of May 2009 (see 1.5-year chart view) and there is a serious danger of having strong correction (see higher timeframe charts).

Sunday, May 24, 2009

S&P 500 Chart

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Another week is behind. The stock market is doing what it supposed to do (in the meaning of my technical analysis results). The main U.S. indexes (Nasdaq 100, S&P 500 and DJI) followed the pattern defined in the "S&P 500" post on May 14, 2009 and in the "S&P 500 Analysis Follow Up" post on May 18, 2009. In particular, the indexes moved up - back to the May 6-8, 2009 highs, but did not break those levels. Then the indexes have dropped down again.

Now, the same traditional question that bother all trader: "Up or Down?" The answer on this question could be different depending on the personal trading style. If you are long-term trader and expect to stay in position for years then you could be looking for the answer in long-term charts, in the analysis of the economy and fundamentals. On the other hand if you are short-term ETFs (Exchange Traded Funds) trader could be looking for the answer in the technical analysis of the short-term index charts.

I am not here to discuss long-term analysis of the U.S. stock market, and I am not here to say where the market is going to be on the next trading day after the market open. I usually do one post a week where I am trying to cover technical analysis of the 60-day (hourly, 1 bar = 1 hour) index charts. Depending on the market volatility these charts are covering 2-5 days trends, and even I do not trade these charts (I’m short-term trader) I use them to see the general sentiment of the indexes and accordingly adjust my trading strategy.

Coming back to the traditional chart setting you may see in my blog, I may say that the majority of the technical indicators on the S&P 500 index are Bearish. The similar tendency could be noted on the Dow Jones Industrial index. The Nasdaq 100 is not as bearish as S&P 500 and DJI, yet, still negative. I would not make a statement that the indexes are strongly bearish. There are some bullish indicators could be seen as well.

S&P 500 chart technical analysis
From the chart above you may see that there is some dominance of the bearish sentiment. It is not a strong dominance: the currently bearish indicators have been bullish on Friday May 23 almost whole trading session and has become bearish only by the end of the day (you may see RSI and Stochastics started to move down again). One of the main reasons why I would shift the odds in a favor of bearish move is because of the volume surge at high price on May 20, 2009 in S&P 500 and DJI sectors. We do not see such high volume on the Nasdaq 100 index, however, we have not seen a high volume on the Nasdaq 100 during the price decline on May 13, 2009 neither.

Even my technical analysis is somewhat bearish at this moment, I would still keep my eye closely on charts since the indexes are close to the May 13, 15 and 21 lows (see lower blue line on the S&P 500 chart above which mark shorter-term sensitive level) to see if this line is going to be broken.

Again, my technical analysis is subjective and reflects my personal view on the market. I may only recommend doing your own personal analysis which would fit your personal trading style.

Monday, May 18, 2009

S&P 500 Analysis Follow Up

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A few days ago on Thursday May 14, 2009 in my "S&P 500" post I have mentioned about good odds of the indexes rallying back to the May 8, 2009 highs ("I use in my technical analysis are bullish and point to the good odds of the further recovery"). In the same post I expressed my hesitation about indexes breaking these highs. Now, the Dow Jones Industrials index came close to its May 8, 2009 high. The S&P 500 and Nasdaq 100 indexes are still  below.

We had a nice recovery today, yet, I am still staying on my position, expressed in my previous post, that I would not expect to have May 8 highs easily broken. Yes, my technical analysis (my technical indicators) is bullish at the current moment, yet, I would still consider that this is important to keep an eye more closely on the charts over the last couple of trading sessions.

Thursday, May 14, 2009

S&P 500

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It has been for a while since I post a chart in my blog. I usually do not do any technical analysis posts during the week (as a rule I do it on week-ends), yet, I'm just have time to put a few notes. By referring back to my previous week "Industrial and Financial Sectors" post where I mentioned about a possibility of shifting in supply/demand balance which may lead to the dominance of bearish sentiment on the market and as a result to the correctional move down, I may say that this week we saw this move. The strongest drop has been noted in the Nasdaq 100 sector. Actually this was the strongest Nasdaq 100 index drop since March 9, 2009 (reversal day - see my "DJI Chart" post on March 1, 2009 where I predicted that reversal). I cannot say it about DJI and S&P 500 indexes, on the other hand these indexes did not run up as high as Nasdaq 100.

Today we had a positive session - some recovery after the down turn. There is always a traditional question: What is next? Will market go up? or will it drop further down? From the S&P 500 chart below you may see that majority of the technical studies I use in my technical analysis are bullish and point to the good odds of the further recovery. The last Bearish volume surge in the S&P 500 and Nasdaq 100 sectors confirms it. However there is a few factors that make me hesitate about expectation of a strong recovery. There are a some of them:

1. I have not seen Bearish volume surge (volume surge during the price move down) in the Dow Jones Industrial index;

2. Since March 9, 2009 the market has been moved strongly up and we have not seen any strong correction;

3. The first correction during the 2 month recovery was at the end of March 2009. This correction was not a strong one nor a prolonged one. As a rule second correction should be stronger because it is further from the March 9 bottom and market become more overbought as it was in March;

Because of that, at this point of time, even if I see further recovery I would not expect the market (indexes) to go higher than May 8, 2009 highs. At the same time I would more closely watch the intraday charts since there are good odds we may see market reversed down again. The good news is that is that volatility goes down: VIX (volatility index) moving lower, ATR (Average True Range) is moving down as well (I monitor them on daily chart). That tells that it is very unlikely to have crash down. Stock market becomes more quiet and if we see correctional move down it should not be a dramatic movement.

S&P 500 chart analysis

Wednesday, May 13, 2009

ETFs Trading

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ETFs (Exchange Traded Funds) was launched in 1993 with introduction of SPDRs (ticker: SPY) that tracks the S&P 500 index. Still SPDRs remains as one of the most traded stock (not just exchange traded funds) on the U.S. stock market. ETFs should always be look at as funds that could be traded as.

To see advantages of ETFs trading the one should compare them to mutual funds trading first and then to stock trading. By comparing ETFs to the mutual funds we may see that:

  1. Intraday Trading: Mutual funds are always traded at the market close once a day and no matter when you place order to buy/sell mutual fund your order will be filled at the same time (at market close) and at the same price as orders of all other investors. Exchange traded funds could be traded as stock and you can purchase or sell them during the market trading hours. The ETFs provide investors with intraday trading flexibility of stocks which allow benefiting from the intraday price movements;
  2.  Ability to Sell Short: As a rule when you invest into mutual funds you buy them - you cannot sell them short to open a position. For this purpose you have to look for inverse or Bear funds. That means that you have switch between bull and bear funds or participate in trading only in Bull markets (as a rule only index funds has inverse funds). In case of ETF, as was mentioned above, you trade it as stock, furthermore, you may sell it short and participate in Bear markets as well without looking for additional trading vehicle. Because of that, ETFs provide investors with wider range of speculative trading strategies in comparison to mutual funds;
  3.  Low Cost: Exchange traded funds are considered as cost efficient trading tools. Because of their low cost a lot of professional and retail investors chose them for investments.

By comparing ETFs to stocks we may see other three points:

  1.  Diversification: When you purchase a single share of ETF you invest into all stocks from the basket of the index this ETF tracks. For instance, by buying one share of QQQQ at $40, you invest into all 100 companies listed in the Nasdaq 100 index. Try to imagine how much it would cost you to buy one share of each company from the Nasdaq 100 index in order to get similar diversification;
  2.  More conservative than stocks: The ETF price cannot drop to zero, ETF cannot be broke and it cannot file a bankruptcy. If you see it then this is The End. Index listing is managed by professionals: weak companies are reviewed on a regular basis and when it is necessary are replaced by the stronger companies. In case of DJI the listing is managed by “Wall Street Journal”, in case of S&P 500 the listing is managed by Standards & Poors, Nasdaq 100 index is managed by Nasdaq OMX, etc. They basically do portfolio selection and all fundamental analysis instead of you;
  3.  Easier to analyze: By having several stocks in your portfolio, it could become complicated to analyze them. You have to do some fundamental analysis for each stock, look at chart and do some technical analysis and in addition it is recommended to analyze indexes that cover your stock to see your industry and whole market general trend. It could be quite complicated and time consuming. The ETFs analysis is simpler and very often it could be narrowed to technical analysis of indexes only.

As you may see that ETFs have become very popular because they attract mutual fund investors by their low cost, tax efficiency, saved features of the mutual funds and obtained flexibility of stocks. At the same time ETFs attract stock investors by their ability to diversify portfolio, simplified analysis, protection from bankruptcy. I may say that it is easy to understand why ETFs has become the most popular trading vehicle among all type investors, including large institutional investors, small speculators and active traders. Exchange traded funds have become very liquid (you may sell and buy them very fast) which is another important advantage. Some of the most traded ETFs are: SPY (tracks the S&P 500 index), XLF (tracks the S&P Financials), QQQQ (tracks the Nasdaq 100 index), DIA (tracks the Dow index), IWM (tracks the Russell 2000 index), etc.

Monday, May 11, 2009

Best Technical Indicator

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Which is the best technical analysis indicatorket?

I would recommend those you know the best, but not more than 3 technical indicators. In addition I may recommend using ADX and ATR – not to generate signals but to recognize different market stages and adjust indicators setting accordingly. On my opinion majority of technical indicators works well. A trader just need to know what market he/she is trading is: is it strong trend, is it flat market, is it volatile or quiet. As a rule ATR and ADX gives this picture.

Wednesday, May 6, 2009

Industrial and Financial Sectors

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Just a short post. Today's daily volume on the S&P 500 index is the biggest volume over the last 2 months. Taking into account that this volume surge has been noted during the price advance I would assume that we may possibly see the shift in the supply/demand balance. Similar situation could be seen on the Dow Jones Industrial index. The Nasdaq 100 index does not have such high volume surge, however, this index has been moving flat for the last three trading sessions. Comparing different market sectors I may say that the highest trading activity could be read in the industrial sector ( DJI, Nasdaq Industrials, Nasdaq Capital Markets). I can see high volume in the financial sectors as well - Nasdaq Banking and Nasdaq 100 Financial - yet not as big as in the industrial. Other stock market sectors (DJI,DJU, Nasdaq Internet, Nasdaq Computer) have relatively smaller volume surges or do not have increase volume activity at all.

I do not know why we can see increased trading in the industrials and financial sectors. It could be because the investors are waiting to see Chrysler bankruptcy and how it will affect automotive market, or those investors who bought in February decided to pocket a profit or it could be something else. I know one thing - such big volume means that big number of investors (or small number of investors with big money) started to relocate their investments and that may lead to the change in the supply/demand balance and as a result to a change in the stock market sentiment.

I would personally watched very closely stock market over the next couple of sessions to see how the market will react on this volume. I am not telling that the market will drop tomorrow, it could continue to move up, however I would prefer to stay in cash for now. Maybe I'm wrong and maybe I'm loosing opportunity to make some profit, yet, I consider there are moments when it could be useful to stop and monitor for a while in order to see the development of events - in current situation development of reaction on this high volume.

Tuesday, May 5, 2009

Index and Stock Trading

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I consider index analysis as one of the most important element in any trading system. A trader should know the general market trend and only index analysis can help with this. I would say there are 2 main points in the index analysis that should be used for stock trading:

  1. Analyze DJI and S&P 500 indexes to see the general market trend – you do not want to trade against the general market trend, especially if you mid- or long-term trader. If based on the S&P 500 and DJI technical analysis you may define whether the economy is in the recession or on the rise, then you have to build your investment strategy in accordance to this. You do not want to see your pension funds, other long-term and mid-term investments in the long position if the market is in the recession. At the same time it would be wrong to stay in cash if you see the stock market in recovery and up-trend.
  2.  Analyze the index your stock belongs to. If you trade stock of the of the internet company and this stock is covered by the Nasdaq Internet index I think it would be logical to take a look at this index to see the general tendency of all internet publicly traded companies. If you trade stock of the financial company, you may want to take a look on the S&P 500 Financial, Nasdaq 100 Financial or other financial indexes. It could be useful to know what is going on in the industry your stock belongs to.

In general there are only two rules based on the index technical analysis recommended when you trade stocks:

  • It could be safer to stay in cash when result of the index technical analysis contradict to the results of your stock technical analysis stock;
  •  It could be recommended considering opening a trade when signal based on the stock technical analysis goes along with results of the index technical analysis.

By embedding elements of the index technical analysis into a stock trading system you may substantially reduce the number of trades, however I would consider it more conservative trading.

Saturday, May 2, 2009

Index Technical Analysis

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Another week of almost flat market is behind. The Dow Jones Industrials is only 1.7% up from the previous week close, the Nasdaq 100 index gained 1.7% up as well and the S&P 500 index moved only 1.3% up from the previous week close. It would be wrong to say that this is a positive market; as well it would be incorrect to call this market Bearish. Starting from the April 2, 2009 the DJI index is in almost flat market (see my previous "S&P 500 Chart" report on April 25, 2009). The S&P 500 index did start to move side-way on April 9, 2009 - almost a month ago as well. The Nasdaq 100 index that was less affected by the recession (no financial stock in this index listing) was one of the most Bullish indexes, yet, still almost flat.

So what is going on the stock market from the technical analysis point of view? The stock market has been extremely oversold in all terms during the recent recession. In additions many of the stocks (companies), because of the crisis in the financial sector, were traded below its actual value (they were under evaluated). As a result we had strong recovery movement in period from February 9, 2009 until April 9, 2009. Any strong movement up leads the market into at least short-term oversold condition when the first wave of the investors who wanted to invest into underpriced stocks become exhausted and the second wave of the investors is not coming very fast to keep up-trend moving. For further healthy recovery the stock market needs to be released from these oversold conditions, attract more investors and that is why healthy bullish market supposes to have corrections.

We had one month of up-move and now we have one month of side-move. The same as last week I would say that I’m still in bullish mood, still I may consider possibility of some correctional movement down. Even if my technical analysis is correct and we see drop down, I would not expect it to be strong and prolonged in the time, but rather shallow and short lived.

There are several factors that make me believe in that:

1. Over the last month, by looking on the short-term index charts I may say that according to my short-term technical analysis the indexes very actively reacted on every (even small) volume surge to the index downside by immediate reversal up-move.
2. From the same short-term technical analysis I may say that there were number of occasion when bearish signals were ignored and price continued to move flat or up.
3. The stock market started to ignore negative news. Even we hear and see every day complains about swine flu and Chrysler bankruptcy and TV financial "gurus" are making statements that it negatively affects the market – we still have not seen any strong movement down.

This is one of the characteristic of the long-term bullish market when the majority of investors ignore bearish signals and negative news. In opposite every positive news and bullish signal attract investors to come back into the market and start to invest by buying.