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.