Technical Analysis

Coming back to the technical analysis I may say that do far we have not seen a market reaction on the oversold indication seen on January 21-22, 2010.

The good news is that the S&P 500, DJI and many other indexes did not dropped strongly since then, by indicating a possibility that these indexes hit the bottom of the correction. If you check the S&P 500 financial sector index you will see that this index is at its low (support) level which was already tested in the middle of August 2009, beginning of September 2009, beginning of November 2009 and December 2009. For many indexes (like in case with S&P Financial Index) the current level is very strong support level and the fact that these indexes had difficulties in following the Nasdaq 100 last week decline is a good sign.

The bad news is that the Nasdaq 100 indeed declined. I have seen many times when the down move or up move was started by one index and then it was picked up by the rest of the market. The fact that the Nasdaq 100 declined strongly and indexes ignored the oversold signals on January 21-22, 2010 tells that we still could wait for another wave of panic selling.

From this point of view I would say that the odds of the end of the current correction are 50/50 and I would say that a lot depends if the rest indexes will get into selloff scared by this week's selloff in the Nasdaq 100 sector.

So far the technical analysis of the charts suggests possibility of the further decline. However, there are many signals that suggest oversold condition and possible support. Some of them are:

1. Low negative MVO on all indexes which would indicate big bearish volume surges and strong panic selling in all market sectors - this usually leads to the shift in the supply/demand balance and reversal. It worth mentioning that the daily volume in the Nasdaq 100 sector on January 29, 2010 is the strongest daily volume in this sector since April 20, 2009.

2. Low Advance/Decline readings on major indexes would suggest the oversold condition and possibility of the reversal as well.

3. High volatility. If you check the ATR(9) on the Nasdaq 100 1-year chart you will see that the volatility on this index is at its March 2009 level (bottom of the stock market crash). On the S&P 500 and DJI indexes volatility have climbed to the beginning of November 2009 level (support of the October's correction).

I would say that the oversold signals are very strong and we may see strong bounce up. However it does not mean that we will have it tomorrow. What I want to say is that the stock market is predisposed for a recovery move up, however it still could slide lower. I may say only that because of the high volatility I would expect to see sudden and strong reversal and it could be tomorrow or it could be in a week. In this case I would only recommend monitoring shorter-term charts as well as some lagging indicators that would confirm a reversal.

Nasdaq 100

Last week in my "Advance/Decline" post on January 24, 2010 I have expressed my thoughts that taking into account volume and advance/decline indications on main indexes (S&P 500, DJI, Nasdaq 100) we could be closed to the bottom of the current correction. However, the past week was negative.

The Nasdaq 100 index was the main player who pushed the market down. The Financial Sector (see S&P Financials), Housing Sector (see PHLX Housing Index) and some other market sectors were flat. The S&P 500, DOW indexes (DJU, DJI, DJT) where flat the first half of the week yet slides by the end of the week under the pressure of the hi-tech companies from the Nasdaq 100 index.

You can hear in the media that the market is upset by the political balance, that Wall Street was worried about Bernanke re-election, that banks were upset by the proposal of the additional taxes, etc. I just do not buy it - those news are not the news that moves market.

Take a look at the Nasdaq 100, DJI and S&P 500 5-year chart. The Nasdaq 100 index during the 2008 stock market crash had smallest loss, there were no big volume surges during the stock market crash and the Nasdaq 100 had strongest recovery after the crash. What does it tell? It simply tells that the main panic was in the financial and transportation sectors. That is why S&P 500 and DJI crashed stronger. The big investors were desperately pulling money out from these two sectors - that is why we may see huge volume during the crash on the S&P 500 and DJI indexes. Big investors were not pulling funds out of the Nasdaq 100 companies - there were no huge volume surge in this sector during the stock market crash. In opposite the big investors were relocating funds from the transportation and financial sectors into hi-tech companies. That is why the Nasdaq 100, Nasdaq Biotechnology, Nasdaq Computer and Nasdaq Internet indexes completely recovered by the end of December 2009 from the 2008 stock market crash.

Now when the Hi-tech sector was at the top, the some of big investors started to take profit out. Does it mean we will see another strong down-trend? Not necessary, for this we need to have strong panic news like bubble in housing sector (2008), internet bubble (2000), etc. Yet, I think the period of the recovery rally on the Wall Street from the stock-market crash could be over and now we could see something like we saw in 2004-2006 - quiet up and down trading with positive or negative bios until somebody make a new bubble.

Advance/Decline

It was clearly bearish week. In my previous week "S&P 500 Chart" post on January 18, 2010 I  have stated my points, why do I believed in to coming correction. The main my point was an increase in volatility. By following my words, we had strong advance on Monday, which only moved volatility level higher, and as a result the strong decline for the rest of the week. On Thursday January 21, 2009 in my "Volume, Volatility and Advance/Decline" again, I have confirm that this does not looks like the end, mainly because advance decline reading did not hit critically low levels by indicating panic selling. As a result, as I mentioned the previous post "the next move down could be even stronger than we had over the last two days" Friday, the last day of the week, brought us even stronger decline.

One more time you may see an importance of monitoring several technical indicators at the same time. In my understanding professional technical analysis combines analysis for the price, volume, volatility and advance/decline data. One may say that he/she can use a price indicator with success. However, without volume, advance/decline and volatility technical analysis I do not believe it is possible to define the current trend stage, to see where the stock market is moving, predict possible strong changes in a trend and be on the alert when market, index or stock may crash. Only combined analysis of volume, advance decline and volatility data may give you one step ahead vision. Those who disregard these data, I believe, sooner or later, will be caught by the week similar to the one we just had.

The same is with indexes. Even if you do not trade indexes (ETFs and other index tracking securities), you have to monitor and analyze them. If your stock was generating buy signals this week and you did not understand why it did not move up, then by taking a look at indexes you would understood that the general bearish sentiment took over the stock market and your stock was drugged by the general stream of the market.

Coming back to the technical analysis, I would like to say that on Friday January 22, 2010, the S&P 500advance/decline readings did dropped to the extremely low level by indicating strong panic selling. We have not seen such low advance/decline reading in the S&P 500 sector since November 27, 2009. The indexes and market may go further down, however, the history analysis (that is done since 1997) shows that at this point we may see a strong bounce and resumption of the up-trend – unless there is a stock market crash (I do not think that this is the case).

Another point is very strong daily volume over the last two days of the week. On those days, the daily volume in the Nasdaq 100 and S&P 500 sectors were the strongest one since December 18, 2009, and on DJI it was the strongest daily volume since December 4, 2009. If we see e decline in volume activity, the principles of volume based technical analysis would suggest that the panic is over and we may see a reversal.

Taking into account volume and advance/decline indication I would not risk by holding the short position right now. The only what I would accept is a trailing stop which would protect earned profit and would give a chance to make more. Yes, we still may see slide down or we may see modest advance and then decline to the new lows. However, I think we are close to the bottom of the recent decline.

I am not stating that we are at the longer-term bottom and over the next few months we will have bullish market as we had after November 27, 2009. We can have it, but it is not necessary has to be the case. We can have just bounce to the most recent high (January, 2010 highs) and then we can have slide again. I do not know what is going to happen in a month. Even if I look on longer-term charts, my view is always adjusted by new coming data and could be completely changed. Right now my technical analysis tells me that we could be close to the bounce up. If this happens, then we will take a look at the next step which, in my case, would be based on the combined technical analysis of price, volume, advance/decline and volatility data again.

Volume, Volatility and Advance Decline

I usually do not make posts during the week. However, I could be nice to say a few words. I think may traders are wondering if they should panic. I would like to drag your attention to several factors:

1. Today's daily volume very high and may push tomorrow indexes up. If this does not happened tomorrow and we will have flat trading or just shallow advance then I think we may see further slide.

2. Volatility is going up - this is a bearish sign. If we see tomorrow strong up move as reaction on today's bearish volume it only will add to the volatility and the next move down could be even stronger than we had over the last two days.

3. Even we saw today big selling volume, the advance decline data on the S&P 500 were not extremely Bearish (extremely low), which would mean it is not a panic selling yet and there is still a room to go down.

S&P 500 Chart

Last week in my "Mixed Market" post on January 10, 2010, despite prior up-move in period from January 4, I was a little bit sceptical about further up-move (see four points I mentioned in that post). Now, one week later we have indexes lower after volatile week. Coming back to those four points:

1. High volume during the up-move in period from January 2 until January 8, 2010 - this point is still actual and this bullish volume still would suggest overbought market with possibility of a decline;
2. Second point was low volatility with possibility indication of coming action "squeeze before strong events" - actually we had some strong movements up and down during this week, and actually volatility started to climb up which is a bearish sign.
3. Third point was that I did not like sharp up-move at the end of trading on Friday January 8, 2010 since it did not fit overbought condition. However, already on Monday January 11, 2010 strong opening and then strong decline down changed my view. I already mentioned several times before about sharp opening and then strong decline at resistance levels as a good Bearish signal.
4. Forth point was huge volume in C stock (Citigroup) - this volume still bothers me, since I still do not see a reversal reaction on it.

Now, coming back to the technical indicators and technical analysis I may say that majority of indicators on NASDAQ 100, S&P 500 and DJI (indexes that I track) charts are bearish. However, these indexes already were bearish a few days ago on January 12, 2010 and then we had a strong recovery on January 13, 2010. Now the indexes down again and technical analysis generates bearish signals again. There is only small one difference between current bearish indications and bearish signals on January 12 - volatility now is higher. This would increase the odds of possibility of further decline.

I have posted the S&P 500 index chart with indicators I use in my technical analysis. I have not done it for a month assuming that those who follow my blog already knows what tools I use and they have access to the same charts in real time. I usually look at hourly charts (1 bar = 1 hour) and hourly charts are not the charts that help to predict a mid- and long-term trend. These charts are intraday charts and they should be monitored during the trading hours.

Chart #1: The S&P 500 chart with some elements of technical analysis

Mixed Market

Past week was market by a side-way trading on the DJI and Nasdaq 100 indexes - these indexes are basically on the same level where they were on Monday. The S&P 500 in opposite to the rest of the market moved slowly up.

There are several things that I would like to mention. First one is that during the past week, the S&P 500 index up-move was supported on high volume. The S&P 500 index daily volume on January 7, 2010 is one of the highest volumes since November 2, 2009 (the only higher daily volume was noted on December 4, 17 and 18, 2009). The same with Dow Jones Industrials (DJI): the only higher daily volume than the daily volume on January 7, 2010 was noted in DJI sector on November 17 and 18, 2009 (since November 2, 2009). This would signal that there is a possibility that the current side-way with positive bios trading could be close to the end. As a rule high volume during the price advance could lead to the shift in the supply/demand balance when the number of Bullish traders became exhausted.

Second thing that I would like to mention is the low level of volatility. As a rule, if the market would be going for a correction we should be seen increase in the volatility. In opposite we see big decrease in volatility. Actually, the volatility level on DJI and S&P 500 index has dropped to the lowest since October 17, 2007 level. Traditionally, the low volatility suggests stability on the market and dominance of Bullish sentiment. Yet, some analysts characterize strong drop in volatility as a squeeze before some strong events - like a "silence before storm". The good thing is that if the market meant to go into correction, most likely it will not be a stock market crash and majority of traders should be able to spot it.

Third thing that I would like to mention is the strong recovery before the market close on Friday, January 8, 2010. This is not a typical recovery for overbought market...

Last thing worth mentioning, from my point of view, is the high volume surge in Citigroup stock on December 15-19, 2009. This volume was even higher than the volume in C stock during the stock market crash. I usually do not look for stocks, however we all know that the Government has (or had) part of the shares of Citigroup. Was it Government dumping bailouted shares... If yes then what does the Government know that we do not know? If it not the Government then who was dumping such huge amount of Citigroup shares in panic???

Nasdaq 100

The last week of 2009 (see my previous "Light Volume Trading" on December 27, 2009), as I expected, was relatively flat and quiet.

Taking a look over the last month we may see that the DJI has been trading mostly side-way in the narrow 2.5% corridor (see my "DJI" post) since the middle of November 2009. The DJI has been trading above the upper line of this corridor just for a couple of trading sessions, yet on December 31, 2009 this index dropped back into its corridor range.

The S&P 500 index has pattern similar to the DJI trend. It advanced about 100 points (about 1%) above the upper line of its November-December side-way trading range and on December 31, 2009 it dropped back.

The NASDAQ 100 index was an exception from the DJI andS&P 500 indexes rule. In opposite to the rest of the indexes and the rest of the stock market, starting from the middle of December 2009, the NASDAQ 100 index advanced strongly.

Personally, I did not like this move on this index. It is a strange to see a rally on the single index while the rest of the stock market is hesitating in starting a correction down. The current behavior of the NASDAQ 100, DJI and S&P 500 indexes remind me the minimized variant events in 2007. If you open 5-year index chart you will see that the DJI and S&P 500 indexes stopped their up-move in May 2007 and these indexes where mainly traded side-way until the beginning of November 2007. The NASDAQ 100 index (in opposite to the rest of the stock market) continued to move up strongly until the beginning of the November 2007 as well. And then, in November 2007 strong correction started which then turned into strong down-trend which then turned into dramatic stock market crash.

Such stock market behavior could be explained in the way that after strong long-term up-trend (in period from June 2006 until May 2007) the stock market became heavily overbought and was ready for a correction down. The stock market was ready for a correction down in May 2007, yet the NASDAQ market sector still had a potential to move higher and still was collecting greedy buyers and delaying the rest of the stock market from a correction. Then in November 2007 when the NASDAQ sector has become heavily overbought as well and was not able to hold the rest of the market from the correction we had a beginning of a strong decline. It is another story that during this decline (in August-November 2008) the market discovered housing bubble in the financial sector and discovered that automotive industry oversupplied the market, which all lead to turning the strong decline into the strong stock market crash.

Right now we have some similar mini-version of the same events. Since July 2009 we have not seen any strong correction. Mostly positive trading pushed US indexes strongly up. There is a possibility that the indexes and corresponding stock market sectors has become overbought and are ready for a correction down, which would be very healthy. Yet, theNASDAQ 100 index continued to collect the buyers while the rest of the market was trading side-way. If the indexes are overbought and just waiting for the NASDAQ to reach its overbought top, then when it happens, I think we may face a stronger that usual correction down.

I am not stating that we may face another stock market crash. Stock market crash does not start suddenly in one day. A rule it starts from the strong correction down and if during this correction very bad news are revealed, than there is a possibility that the "very very very bad news" may turn a correction into crash.

Overall, despite the positive sentiment on the market, I am a little bit skeptical about further up move. Taking look at longer-term index charts you may find that many technical indicators signal strongly overbought levels. We have not seen any strong correction since the begging of the recovery after the crash (since March 2009). On longer term charts, the only noticeable correcting occurred in June 2009 (about 10% on majority of indexes). The NASDAQ 100 completely recovered from the crash by running above its September 2008 level. So, I think that the market should be at least a little bit overbought and it would be healthy to have a correctional move down... unless we are at the door of another bubble...