Advance/Decline

As I mentioned a week ago in the "Flat trading and volatility" post on February 14, 2010 the Nasdaq 100 index is at its January 26, 2010 high, while the S&P 500 and DJI indexes run over their January 26 and February 3, 2010 highs. So, I may only say that advance decline indicators that signaled the oversold level and coming reversal (see my "NYSE Advance Decline" post on February 4, 2010) have been paid out...

I think many traders, including some readers of my blog, were skeptical about reversal on February 4, 2010 after the market close when I published my thoughts about NYSE advance/decline reading. I believe now, those traders may consider re-evaluating their opinion about advance/decline indicators. Advance/decline indicators is not something that would generate signals several times per day. However, I'm ready to wait patiently  (even for several months) in order to have ability to play such perfect signals.

Coming back to the technical analysis, the next question would be whether the indexes will run to their January 19, 2010 high levels. There are several factors that would favor the continuation of the recovery from the recent correction. First of all the, the last week recovery did not generate any volume surges to the price up-side. Which tells that, so far, this up-move is stable and there are no any abnormal trading activity that may cause shift in supply/demand balance in a favor of bearish traders. The majority of technical indicators remain to be bullish, especially on higher time-frames.

On the other hand, when you take a look at lower time-frames, you may notice that many indicators are overbought in short-term, by signalizing a possibility of some retracement, at least in a short-term. The stock market (majority of indexes) right now is in the range of its side-way trading where it was in period from November 10, 2009 until December 18, 2009. This is another factor that may suggest a possibility of staking in this range for a while.

Overall, I would say that the odds are still good for indexes (Nasdaq 100,S&P 500 and DJI) to run to their January 19, 2010 highs (of course not in one trading session). However, shorter-term time-frames suggest possibility of some move down and I would monitor it to see if it may grow into something more bearish.

Please, bear in mind that those are my personal thoughts, and before relaying on my words I would highly recommend taking look at charts and technical analysis by yourself. I'm sorry I'm not posting any chart snapshots today. I think majority of my readers are traders or other people interesting in stock market, who, as a rule has access to charts.

FED Rate Increase

After the market close QQQQ (Nasdaq 100 tracking stock), SPY (S&P 500 tracking stock) and DIA (Dow Jones Industrials Tracking stock) sharply went down around 16:30 as FED announced the rate increase to 0.75%. As a rule FED rate change usually affect stock market in short-term only and as a rule the indexes are very volatile during these announcements. It could be that the indexes will be down tomorrow at the market opening - let's see if they stay the rest of the session in negative area.

Flat Trading and Volatility

As I expected and as I mentioned in my "S&P 500 Chart" post on February 7, 2010 the indexes and the market are moving up from their February 5, 2010 low. Still it's difficult to call this up-move as a strong recovery. 3% on the S&P 500, 2% on the Dow Jones Industrials and 4% on the Nasdaq 100 does not looks like the market is in a mood to show strong reaction on highly oversold indications noted in period from January 29 until February 5, 2010.

Taking look at technical analysis of volume, advance/decline and price based indicators I may say if at the beginning of the week majority of the indicators signaled bullish trend, right now, after one week of almost flat market, we still may see bullish indications yet, these indications are not as strong as they were a week ago. Still, I would say the odds would favor the recovery towards at least January 26, 2010 highs. However, we may see change in the sentiment any trading session.

We should not forget that the stock market has been in the strong up-rally for six months (since the middle of July 2009 until the middle of January 2010). It would be natural and healthy for the stock market to have a strong correction down (as we have now). It is difficult to state how strong the current correction should be in order for the market to resume its up-move. It could be that on January 5, 2010 we saw the bottom of this correction, still there is a possibility that we may see some further recovery and attempt of the market (indexes) to revisit the most recent lows.

The biggest concern that I have at the current moment is that within the last week of almost flat trading we have not seen decrease in volatility. Yes, the indexes (S&P 500, DJI and Nasdaq 100) have moved up couple of the percents, however, this up-move has been volatile.

S&P 500 Chart

I have already mentioned in my Thursday's "NYSE Advance/Decline" post about my thoughts of coming reversal as a reaction on extremely low Advance decline reading in all market sectors including but not limited by the S&P 500 index sector, DJI index sector, Nasdaq 100 index sector and most important by NYSE Composite sector.

When could we expect it? It is possible that Friday's drop down and strong recovery marked the bottom (support level). It could be that we still may see some volatility and slide down... Yet, I consider that we can see up move very soon. Taking into account the volume during the recent correction I would say that the market (indexes) have been strongly oversold and it is predisposed to move up to the February 2, 2010 highs and even to the January's highs.

I understand that many traders are afraid that the recent crush may grow into long-term recession. Personally I do not even consider it right now. Long-term recession and stock market crash does not start suddenly. There should be very bad economical news to trigger recession. Yes, we can see a year of side way trading as it was in 2004 and 2005. Yes, during this sideway trading the stock market can go lower. Yet, I do not think that somebody was able to generate another bubble, unless there are political factors that we not aware of and which that may affect the economy (inability of Government to stimulate economy, refuse from China to buy Treasury Bonds, etc)

Coming back to the technical analysis and by taking a look at my traditional set of technical indicators on the hourly chart I may say that may technical analysis is mostly bullish. Many of technical indicators are showing bullish signs and many of them are on the edge to become bullish:

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

NYSE Advance/Decline

Scary drop, isn't it? In my previous "Technical Analysis" report I have expressed my opinion about oversold market and possibility of recovery. Actually we had 3 days of up-move, yet, it was quiet recovery not a strong one as I expected. Today, in one trading session all gain of the previous 3 days has been wiped out. That is why I always mention that charts should be monitored on daily basis which should provide you with ability to spot in time changes in the sentiment.

From one side today's drop is very scary and I am sure it pushed many traders into panic. From other side it completes the picture. I usually do not make posts during the week, yet today is very nice days from the advance/decline data prospective. Today advance decline volume and issues data have hit very low levels. It happened not only on the S&P 500 index but on all major indexes and exchanges. It was on October 15, 2008 when I saw last time such low advance decline readings on the NYSE Composite Index. Other low NYSE advance/decline readings (yet not as low as today) were noted on November 12, 2008 and on July 22, 2009.

History shows that such low advance/decline readings, especially in the NYSE Composite index, suggest strongly oversold market with high odds of close recovery. So, even the today's drop looks very scary it made me optimistic and I would not bet anything on short trading now.

For reference: Advance/Decline Quotes.