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...