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

Financial Sector

I my previous "Technical Analysis" post I have talked about a possibility of correction and we had a small one which does not feet very well into the picture. It's difficult to believe that 2-day small move down on August 5-6, 2008 is the only correction we are going to see after the strong up-move we had in July.

The technical analysis by the end of the week is positive, however, I would not bet on the strong up move. I would rather prefer to see flat market that may turn into stronger than we saw correction down. Still, technical indicators on all 3 main indexes I track (S&P 500 DJI and Nasdaq 100) are positive at this moment and favor further up move.

Mine main concern is the financial sector. If you take a look at S&P Financials, Nasdaq Financial 100 and compare them to the technology and other indexes you will see that for many indexes up-move ended on July 23-27. Many of the indexes are in the sideway corridor since then.Dow Jones Utilities, Biotechnology index and Health Care Index could even be considered in the down-trend since July 27-30, 2009. So, we may say that technology, utilities and other market sectors became overbought and were ready for the correction down in the end of July. Yet, the financial sector continued its rally up and helped to hold the rest of the stock market from the correction. I consider that this is the main reason we did not see a strong correction.

Now, I would like to ask: "What will happen when the rally in financial sector becomes exhausted and financial sector become overbought at least in a short-term?" To answer on this question I would have to find out if the rest of the market is still overbought or the other market sectors become less overbought or even oversold over the last two weeks. If you say that the other sector indexes become oversold or less overbought during 2-week sideway move and shallow decline, than I would say that we may see up move wile financial companies have a correction or sideway trend. If you say that non-financial indexes are still overbought (at least in the short-term) then I would say we may see nice move down.

Personally, I did not see a strong correction on any of indexes (market sectors) and I did not see any volume surges during the price decline over the last two weeks. That is why it is difficult for me to assume that the market is ready for further up move.

Mine main point, beside of mine personal opinion on the market trend, was to show that in some cases it could be useful to take a look at wider range of the indexes. Especially it could be useful when you are in situation when you see Bearish signals, but instead you have sideway market or even modest advance. So, do not be narrow and do not focus on what you trade only. In some cases, when the stock you trade does not move along with yourtechnical analysis it could be not because your analysis is bad, but, because your stock is under an influence of other factors that you do not see yet.

Technical Analysis

The recent week could be considered completely flat with the exception of sharp up-move at the market open on Thursday July 30, 2009. I have already pointed to the short-term overbought market in my previous week's "S&P 500 Rally Up" post. If not this Thursday's sharp up move then this week's sideway trading would look like very nice resistance and now all technical indicators would point to the higher odds of correction down. I reality the picture is a little bit different. The S&P 500 technical analysis of hourly chart (1 bar = 1 hour) shows following:

- The SBV Oscillator (bar period 20) is bearish - it moves down slowly. In addition big bullish volume accumulation from July 13, 2009 may possibly push the indices down.

- The MVO(5,25,3) is Bearish as well. We may see a row of Bullish volume surges with the most recent on July 30, 2009. All these volume surges are result of the waves of greedy buying. The strongest one on July 23, 2009 has halted advance and directed the Nasdaq 100, S&P 500 and Dow Jones Industrial sideway.

- The Advance Decline Oscillator with bar period 12 is close to become bearish. It started to decline, yet it still at high positive level and still could be considered as bullish.

- MACD(15,30,10) is bearish. It declines and it just crossed zero line and went into negative territory.

- RSI(17) dropped below 70, however, it is almost flat and still above 50. So, I would say the Relative Strength Index is slightly bullish.

- Stochastics (17) is slightly bearish. It declines, it moved below 80 yet it is still above 50.

- McClellan Oscillator with bar period 19 and 39 is bullish. It advances above zero line and is still in up-move.

The DJI technical analysis of the same indicators will give you the same result. The Nasdaq 100 hourly chart is slightly more bearish then the S&P 500 and DJI charts.

In conclusion I would say that the main U.S. indexes are overbought over the short-term. We may see some bearish signals. However not all technical indicators are in favor down move. It could be recommended to monitor chart closely next week. Should Advance/Decline Oscillator, RSI and Stochastics decline further it would increase the odds of possible correction down.

I’m sorry I have not provided chart snapshot today. I'll try to do it in my next post.