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.