Nasdaq Health Care

I'll try to make short post this week. Last week in my "Technical Analysis" post on March 21, 2010 I have stated "Overall technical analysis became more bearish over the last week, mainly because of the Friday's decline. Many technical indicators started to show bearish signs. Yet, I would not disregard high volume during the Friday's decline. This volume may push indexes back to the most recent highs." - yes, we had push back, yet the market dropped down and the stock market (Nasdaq 100, S&P 500 and DJI indexes) is where it was two weeks ago (on March 17, 2010)

As I mentioned two weeks ago "I would prefer to stay in cash. On such overbought indexes I think it would be too risky to trade "Long" and 1% of gain over five day does not worth a risk. At the same time it could be a little bit early to open a short position." (see "High Volume and Volatility" post on March 14, 2010) I would continue to stay on the same note. It is better to stay in cash during uncertain market then risk for one percent move.

Yes, the volume and volatility suggest that the market is predisposed for a correction down, yet, I would wait for a conformational signals. Taking into account that we had another week of almost side-way trading I may say the the market became overbought even stronger. The longer we stay at top (possible resistance level) the more shares (bigger volume) are traded at high price and the more overbought market is. Actually, over the last week we had some increase in volatility as well which is a bearish sign. Should we see further increase in volatility it would increase (on my opinion) the odds of a correction.

Just a thought: we still have not seen reaction of the Wall Street on the Health Care Bill... Personally, I would try staying away from buying stocks of insurance and health care companies. If you have access toNasdaq Health Care index, check it - this index only 1 point below its highest historical level which was hit in 2008. Pretty strong rally for this index over the last 12 months. Do you think it will continue to go up???

Technical Analysis

In my previous post (see "High Volume and Volatility" post on March 14, 2010) I mentioned that the market is predisposed to the correction and that I expect to see some side-way trading with preference of staying in cash. Over the last five trading sessions (a week) we saw some up-move with a decline on Friday. At the end of the week, the indexes are about 1% higher from the previous week close. Some may consider it as side-way trading, some may consider it as continuation of up-trend. I would continue to stay on the same position I was a week ago: I would prefer to stay in cash. On such overbought indexes I think it would be too risky to trade "Long" and 1% of gain over five day does not worth a risk. At the same time it could be a little bit early to open a short position.

My position of "staying in cash" is based on the same technical indicators I mentioned a week ago: strong bullish accumulation (result of positive money flow since beginning of February 2010), High volume surges during the price up-move and some increase in volatility. All of this suggests the market (based on the S&P 500, DJI and Nasdaq 100 indexes) is predisposed to the movement down.

Overall technical analysis became more bearish over the last week, mainly because of the Friday's decline. Many technical indicators started to show bearish signs. Yet, I would not disregard high volume during the Friday's decline. This volume may push indexes back to the most recent highs. On the other hand this decline may grow into correction down.

I know that my posts sometimes could look confusing. On very rare occasion I clearly state my view on the possible future trend. However, if you have at least some knowledge in the art of technical analysis I think you can get some of my ideas, compare my technical analysis with yours and maybe find a correct answer. If you are looking for a straightforward opinion and straightforward signals, I am sorry, this blog is not for you. In this case I would recommend going to payable services and get some auto-trading advices.

High Volume and Volatility

Last week (see "Low Volume and Volatility" post on March 7, 2010) I have talked about possibility of flat trading as indexes come to the January 2010 high levels. Now the indexes are at those levels. The past week could be considered slightly positive (the indexes gained modestly over the week), however we may see slow tuning into sideway trading. Actually, that DOW Jones Industrials (^DJI) index has been already moving flat over the last four trading sessions.

A week ago I mentioned "I would say based on the January's oversold levels and that we did not see any strong bullish volume surges we may expect that the indexes may still go higher. Low volatility and quiet trading would confirm that." Now, we have a different picture. Last four trading sessions the S&P 500 index has been trading on high volume. We do not see a strong volume increase in DJI sector. However, as mentioned above the DJI index is already in side-way action. Two trading sessions on the modestly higher volume in the Nasdaq 100 sector cannot be considered as serious threat, however, the Nasdaq 100 index had 13 positive sessions in a row. I have checked 10 years of the Nasdaq 100 history and I found only one period when the Nasdaq 100 index had more than 10 positive sessions in a row: it was in July 2009 - 12 positive sessions in a row.

If a week ago I hesitated to call indexes overbought, now, I would start considering that the Nasdaq 100 and S&P 500 indexes could be overbought. If you check volatility, you would see that we have increase in volatility as well. While one may explain an increase in volatility by coming Triple Witching week when options index options and futures expire, the other may consider an increase in volatility as an increase in activity of bearish traders.

In summary, I would say that even many technical indicators remain bullish, the results of my technical analysis indicates increased odds of side-way trading with possibility of developing a correction. In technical analysis volume and volatility are considering as leading indicators that signal when the market (indexes and stocks) are predisposed to change its trend. Now, as I see we have such signals. Furthermore, I would prefer to stay in cash by waiting for confirmation signals. I could be wrong and stock market could continue going up, yet, right now the indexes are at very sensitive levels.

Low Volume and Volatility

Another week of bullish trading and indexes (S&P 500, Nasdaq 100 and DJI) have climbed close to their January 2010 highs. In my "Money Flow" post on March 1, 2010 I wrote "I would say that results of my technical analysis are still Bullish and I see good odds of market moving higher. On the other hand, there is a possibility of volatile side-way trading in the same range the stock market is now". This exactly what happened this week - three day of flat, side-way trading and then up-move to the January's highs.

On January 31, 2010 in my "Technical Analysis" post I have talked about coming reversal and on February 4 and 7, 2010 in "NYSE Advance/Decline" and "S&P 500 Chart" I confirmed that the market hit the bottom. In one of my posts I mentioned that at that time the market was strongly oversold and it had power to climb back to the November-December 2009 flat levels and then to the January 2010 highs.

As a rule, when I look at the longer-term charts, I'm not trying to where the market is going to be in a month or two. When a trader (technical analyst) is trying to say where the market is going to be in a month he/she could run into situation when he or she can become relaxed and miss some important and critical events. I look at charts every day (during the trading session and after the market close). When I look at longer-term charts I have made a habit do not analyze where the market /indexes or stock could be in a month but rather say how strongly overbought or oversold market is and what is currently moving longer-term trend. I'm not stating that everybody has to do it, yet on my own experience I found that this is the best way to come to the longer-term charts and longer-term trends.

When somebody tells you that his technical analysis results tell him that the Dow Jones Industrials (^DJI) will be 6% up within a month, I would only tell that this person is a gambler who sells himself as a pro. You cannot tell where the DJI could be in a month. Anything could happen during this time. You may say that the DJI index has power to run 6% up, however, depending on how it runs, it could be 3% run or it could be 15% run. That is why when you make a statement about future trend and this statement is confirmed, it still could be highly recommended to monitor how predicted trend goes.

Now, when the indexes came close to the January's highs I think it could be useful to take a look at this recovery. Even as I said that the indexes (S&P 500, DJI and Nasdaq 100) were strongly oversold by February 5, 2010, we have not see a strong recovery on these indexes. They moved up, however it was very quiet move when most of the time the indexes were in side-way action with only modest advance. The volume during this recovery was stable and this recovery did not generate any strong volume surges. All of this would tell that:

1. The bullish traders are dominant on the market at the current moment, however their pressure is not very strong and they cannot push the price up stronger.

2. Current recovery did not generated any greedy buying when we would see investors rushing into the market and pushing prices up.

3. Current recovery did not generate a strong desire to fix profit a leave market.

I would say based on the January's oversold levels and that we did not see any strong bullish volume surges we may expect that the indexes may still go higher. Low volatility and quiet trading would confirm that. However, I think that the supply/demand balance is only slightly in favor of the bullish traders. One of the scenarios that I'm looking at is side-way trading at January 2010 high levels (it could be higher or it could be lower). If during side-way trading we see an increase in volatility and volume surges then I would recommend checking charts for possibility of another correction.

Money Flow

I mentioned a week ago in the "Advance/Decline" post on February 22, 2010 "... 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...". In the past week we have seen exactly this scenario when the indexes (S&P 500, DJI and Nasdaq 100) stuck in side-way trading. One day we saw indexes dropping down and the next day the strong recovery moved them back to the November-December 2009 highs. Then, we had another day of strong decline followed by another strong recovery. At the end of the week the indexes are almost back at the November-December 2009 highs

Now, after a week of volatile trading, I think a correct question for technical analysis would be to ask if the longer-term indicators (that were bullish last week) are still bullish enough to push the indexes higher toward the next possible "pit-stop". Another question regarding shorter-term technical indicators would be to check if those ones that were overbought in short-term last week are still overbought.

From technical analysis prospective, by taking a look at the longer-term index charts (1- and 2-year S&P 500, Nasdaq 100 and DJI charts) I would say the same I said a week ago. The January's decline was pretty strong and during that decline we had very strong bearish volume surges and extremely negative advance/decline readings. If you check money flow (Chaikin Money Flow, Money Flow Index or SBV) during that decline you may see that the stock market was strongly oversold during that time and accumulated oversold power still has not been released completely. Because of that, I would continue assuming that the odds are still good for further recovery towards January, 2010 highs.

Taking a look at shorter time-frame charts, I would not say that the technical indicators are overbought as they were overbought a week ago. Majority of technical indicators on the 60-day chart are slightly bullish or neutral by suggesting possibility from flat to rising markets. However, you should remember that shorter-term outlook may change any time during a trading session on any day. Furthermore, I would recommend monitoring the shorter-term charts for changes in a sentiment during the trading hours.

Overall, I would say that results of my technical analysis are still Bullish and I see good odds of market moving higher. On the other hand, there is a possibility of volatile side-way trading in the same range the stock market is now. In November-December 2009 the indexes (NASDAQ 100, DJI and S&P 500) have been in side-way action for a month. Now, they have being moving side-way at the same levels for a week only. So, there are still some odds we may see further side-way move.