Sunday, March 7, 2010

Low Volume and Volatility

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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.

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