S&P 500 Technical Analysis

With exception of Monday, the past week could be considered positive. Yet, by the end of the week the indicators make me somewhat cautious about the further trend. The correction we had from June 12, 2009 until June 23, 2009 could be considered as the strongest down turn since March 9, 2009 (since the market is in the longer-term up-trend). The high levels the indexes hit in the beginning of June became a strong resistance barrier. The Dow Jones Industrials (^DJI) has been fluctuating around the same resistance level for a month (from December 1, 2008 until June 9, 2009). The S&P stuck close to its current resistance in December 2008 as well. Yes, the Nasdaq 100 index is one of the indexes that recovered stronger, but we should remember that the Nasdaq 100 represent non financial companies and was less affected by 2008 stock market crash.

So, we may see that June’s high levels are quite sensitive and even if indexes continue to move higher by recovering from the recent correction I would consider that the odds are pretty good that we may see them stuck at the marked resistance level again. I would say that we may even see second bounce from there (this is just my opinion based on my personal technical analysis).

Despite the recent up-move (from June 23, 2009), at the current moment my longer-term technical analysis is not very optimistic. For a longer term sentiment I usually refer to the daily charts: from 1-year (1 bar = 1 day) to 3-year (1 bar = 3 days). I do not give snapshots of these charts in this post, however, I will try to post them in one of my next posts. All these charts are Bearish at this moment: I see negative money flow, I may consider that the market become somewhat overbought after the strong 3-month recovery rally (March-May 2009), average daily trading volume is down which means that the first wave of Bullish investors who push market up become exhausted, etc. Overall, my longer-term technical analysis is Bearish. However, on the other hand, we should not disregard the fact that during the recent correction down the main indexes (S&P 500, DJI, Nasdaq 100, Russell 2000…) were released from their overbought conditions at least partially which could keep the market and indexes at the current high levels.

In a shorter term – see S&P 500 index hourly chart below – we may see some sentiment changes towards bearish mood: SBV moves down, high green MVO (volume surges during the price up-move), declining Advance/Decline Oscillator, declining MACD and declining RSI. Stochastics is still could be considered positive and McClellan Oscillator is still above zero line which is a positive sign as well. In summary, I would say that my shorter-term technical analysis results point to the possibility of slide. Again (as I mentioned before) this is intraday chart and should be monitored during the trading hours for possible changes in the sentiment and trend.

Chart: S&P 500 index 60-day view (1 bar = 1 hour)

Stock Market Crash - 1974

As a continuation of the series of charts dedicated to the stock market crashes I would like to present the Dow Jones Industrials chart in period of 1973 and 1974 years. In almost 2 years the  Dow Jones Industrial Average (DJIA) lost over 45% of its value - not the worst but still the pretty bad and prolonged recession. The crash came after the collapse of the Bretton Woods system, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. The recession was compounded by the oil crisis in October 1973.

Chart 1: Dow Jones Industrial chart, 1973 - 1974, 1 bar = 3 days

DJI Chart

I have expressed in my last week three factors worth of attention. One of them was the indexes (S&P 500 and DJI) moving sideways on the January 6, 2009 high levels. The recent bounce down from these levels confirms that these resistance lines indeed are sensitive for many traders.

While shorter-term charts and technical analysis are positive and show some odds of possible move up to the recent high levels (June 11, 2009 highs), the longer-term charts and analysis are not as optimistic. From the chart below you may see the significant drop in the daily volume which means that the main players (long-term institutional investors – "Big Money") finished investing (relocating funds) into the stock market. Starting from February 19, 2009 these institutional traders were attracted by the bargain cheap price of the under evaluated stocks and were buying in huge volumes. Their buying power was the main engine that pushed the stock market up. Now, when their buying power became somehow exhausted (trading volume become lower) we may expect the stock market trend be more dependable on the smaller players’ sentiment. I would put a question in this way: "Are the long-term non-institutional traders (who have a lot of money but not big bags) encourage the March-June rally up or they consider that they may enter the market later at lower price or when they are more confident?"

The positive thing is (I repeat what I mention in my several past posts) that the volatility is down. That means that even if we see strong correction down it’s not going to be unexpected sudden 10% drop down and most likely majority of the technical studies including trend-following indicators will be able to signal this correction. Actually, I consider that the trend following indicators could be the best in this situation. We already may see some negative money flow; we may see some overbought conditions; we understand that even for the further healthy recovery a correction down would be ok – all we need a confirmation from the trend-following technical analysis.

Stock Market Crash - 1987

Another nice picture of the stock market crash in 1987. On "Black Monday" - October 19, 1987 - the Dow Jones Industrials dropped 22.68% in a single session. This was the biggest percentage drop in the DOW history. It is interesting to see the extremely high volume surge during this crash which marked the bottom of the panic selling. Since volume is always 2-side transaction this huge volume indicates that somebody was buying in big volume from desperate traders until the end of October 1987 - in 11 month (in September 1988) the DOW index was back above $2,700 level.

This volume chart is a perfect example of how institutional money collected underpriced shares from traders who was in panic

Stock Market Crash - 1929

I just thought it would be interesting to see the nice charts of 1929 stock market crash. I had opportunity to browse these charts (courtesy ofwww.marketvolume.com) and decided to share it.

As you may see from the charts below, 200 pointsof crash down in 2 months in 1929, then 100 points up for the next 5 months (until May 1930) and then 2 years and 2 months (until July 1932) down to the $40 level. Keep in mind that 200 points at that time is more than 50% drop from the top in September 1929.

Chart 1: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days



Chart 2: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days

Simple Technical Analysis

Just a short post.

My longer-term technical analysis show the bullish market.  Over the short-term (see chart below) some Bullish dominance as well.

Three factors that I consider worth attention: a) volatility is down to the Nay 2008 level; b) volume on the Dow Jones Industrials and the S&P 500 indexes is down; c) S&P 500 and DJI are at the January 6, 2009 high levels which are considered by many traders as resistance lines from which we could have bounce down. I'll try to provide more details on these three factors in my next post.

Leading and Lagging Techical Indicators

Short Description: some answer on subject of what technical studies to use.

The technical indicators (studies) could be divided into several categories by the type of data they are based on: price based indicators, volume based indicators, advance/decline (or Breadth) indicators and combined indicators that are based on price and volume or price and advance/decline data. The other way to classify technical indicators is to classify them by the way they are used in technical analysis.

There are three basic ways to use indicators in the analysis and a category that would cover each particular indicator depends on what this indicator indicates or what type of signals it generates:

1. Leading Technical Indicators – indicators that signal possible trend reversal in the future;

2. Lagging Technical Indicators – indicators that follow changes in the trend which also called trend-following indicators;

3. Informational Technical Indicators – indicators that do not predict nor follow a trend, but describe market, index or traded security. The examples of such indicators could be ATR, VIX and other studies are used to measure volatility, ADX that is used to measure strength of a trend and define sideway markets, etc.

In many sources you may find that the main role of technical analysis is to generate buy and sell signals. Based on the classification above I would say that this definition of technical analysis purpose is somewhat misleading since the informational studies which are used in analysis do not generate "Buy/Sell" signals. I would rather say that the purpose of the technical analysis is to analyze the current market or stock condition in relation to the past. After that, the result of technical analysis could be used in a trading system to generate "Buy/Sell" signals and most likely a good trading system would use technical studies from each category defined above.

A good trading system would use the leading indicators to signal a possible change in a trend. However, there is no 100% guarantee that after a leading indicator generates a signal you will see a reversal. As an example, a volume surge during the price decline signals possible change in supply/demand balance and following reversal move up. However, it does not tell you when it could happen: in 5 min, in an hour, in a day, etc. At the same time there could be situation when signals generated by leading indicators could be ignored – in our example of volume – the small volume surges could be ignored if stock or market is in strong up or down trend.

Now, we came to the lagging (trend following) indicators. They could be used alone, however, by itself lagging indicators could generate fake signals or generate signal when it is too late to open or close a trade. The best way to use them is in combination with leading indicators: a leading indicator generates signal about possible trend reversal and then lagging indicator confirms this reversal. In this trading strategy a trade is opened only after a lagging indicator confirms previously generated signal by a leading indicator. Al other situations when only one of the indicators signals a reversal are simply ignored. A trading system based on this strategy allows applying more sensitive setting to lagging indicators (by alone it would be considered very risky) and open a trade closer to reversals.

The last group of technical studies delivers important information used in technical analysis to adjust leading and lagging indicators setting as well as modify trading strategy in accordance to the current market condition. For instance ATR (Average True Range) is used in technical analysis to measure market (when applied to indexes) and security (when applied to a single security) volatility. It is usual that in highly volatile market we may witness rapid and strong changes in a trend. In this case a trader could be willing to adjust his/her indicators to be more sensitive (lower bar period setting, go to lower timeframe…). On the other hand in quiet market it could be good idea to set bigger lag (increase bar period setting, move to higher timeframe) and make indicators to generate signals with some delay. The ADX (Average Directional Index) could be another example of using informational indicators. ADX by itself does not generate signals at all -it tells only whether market/stock is in strong trend, weak trend or flat market. Based on the results of ADX analysis a trader may adjust a trading strategy and for instance trade only “Buy” short-term signals in longer-term strong up trend and trade only "Sell" signals in longer-term strong down-trend, and trade both signals during weak or sideway trend.

As you may see there are different technical indicators and as a rule professional analysts always use combination of them. Analysis of one indicator, sooner or later, may lead to the disappointment that this indicator is bad. My opinion is that there are no bad technical indicators - there could be only an incorrect way they are used. If you are looking for technical indicator that would generate stable positive return all the time I would recommend you do not waste your time but spend it rather on learning several technical studies that would help you to see the complete picture and not just some part of it.

S&P 500 Shorter-Term Chart

Those who follow my blog should remember the "S&P 500 Chart" post on May 24, 2009 where I draw the resistance line break of which would signal the end of the flat market we saw in May 2009. It looks like, now, we are back in the bullish market - at least technical analysis of daily charts (1 bar = 1 day) is positive again after being negative for the biggest part of May. Still, I would encourage everybody to take a look at higher timeframe charts by themselves to see what market stage we are in. Even if you do not trade indexes, even if you do not-trade in mid- and long-term, in some cases it could be useful to have some picture about situation on the stock market. It may help you to august your personal trading strategy to the current sentiment.

Taking a look at shorter-timeframe chart (hourly chart: 1 bar = 1 hour) we may see mixed sentiment, yet, with bullish dominance (see S&P 500 chart below). When I mention hourly charts I assume 3-day and smaller trends. Majority of technical indicators on this chart have bar period setting less than 20 and multiplying it by 1 hour (bar time frame) you will have maximum 20 hour coverage which is about 3 trading sessions (one trading session is six and half hours long). However, the market is still volatile (see ATR, VIX and other volatility indicators) and I would not bet on this chart for longer than a day ahead. Furthermore, this chart should be monitored during the trading hours.



Overall, as I have already mentioned above, my technical analysis applied to hourly charts show dominance of bullish sentiment (see direction of arrows for each technical indicator). There are still two negative signs: declining SBV and declining Advance/Decline oscillator, however, SBV is almost flat and previous Adv/Decl red area is much bigger than the recent green one.

General Motors and Citi Group

General Motors (ticker: GM) and Citi Group (ticker: C) are about to be removed from the Dow Jones Industrials and S&P 500 indexes. Very nice news, and good decision - better later than never. Those companies with lousy management should be removed from the indexes a half of year ago. If it would be done in December 2008 when GM and Chrysler requested bailout money (what a scam...), I would assume the recovery would started much earlier. As I mentioned in my "Automakers Bailout - Good or Bad?" post in December 2008: "this bailout could become a waste of money", it is sad to accept, but it happened. I am still taking the same old position: "Old fat, spoiled, lazy dinosaurs has to die in order to free the way for young, strong, energetic wolves who will lead the pack... " - this what is recession is above - to clean the market and economy, so, it can develop further. If there is a demand on a product and a company producing it go bankruptcy then somebody will fill this place and will lead the economy. If there is no demand on a product then nothing and no bailout money will help.