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.