Volume, Advance Decline and Volatility

I have decided to make a quick post - something that I usually do not do during the week. As a rule, I update my blog during week-ends, yet, there is some stuff on my opinion worth mentioning.

I would recommend checking three things:
a) today's daily volume on indexes (Nasdaq 100, S&P 500, DJI and others);
b) advance/decline issues and volume readings on the S&P 500 and NYSE;
c) volatility level on indexes (the same set - Nasdaq 100, S&P 500, DJI)

You may try to compare today's decline with decline we had on April 16, 2010:
1. The same as on April 16, we had very high volume surges during the indexes' decline, yet these volume surges are not as big as those that we saw on April 16, 2010 (today's volume signal is weaker).
2. The same as on April 16, we had today extremely low advance/decline issues and volume readings on the S&P 500 and NYSE indexes, yet today's readings were much lower (more extreme - today's advance/decline signal is stronger).
3. Current volatility is growing and is higher than we had on April 16, 2010.

The first two points above would suggest bounce up which could be similar to the one we had after decline on April 16, 2010. The last point (volatility) suggests that we could be on an edge of a strong correction. I think, there will be a reaction on the first two signals (volume and advance/decline signals) as some up move. I would not try to guess now how strong this up-move could be. If I do not see an up-move reaction then I would not expect to see a strong correction.

Volume and Volatility

It's nice to be right. In the last two paragraph on my last report (see "Volume and Advance Decline Post" on Sunday April 18, 2010) I mentioned "...the stock market ... does not crash suddenly ... It is custom to see side-way trading and increase in volatility ... I would assume that we may see the indexes moving back to their recent highs. The volume surge during the Friday's decline itself may push indexes higher. The third factor pointing to possibility of rebound up is critically low advance/decline volume and ratio reading on Friday 16, 2010 ... I do not expect Friday's decline to grown into strong correction, at least not at this time."

The indexes (S&P 500, Nasdaq 100, DJI and others) have not just bounced back to the most recent highs, but many of them run over by hitting new high levels.

At the current moment many investors (I guess) asking for how long and how far will the up-rally (started in the first half of February, 2008) go? I bet many traders (including me) expected down move in the March 2010 during the side-way trading (see the "Resistance Corridor" post on April 3, 2010). Yet, the market continued its rally - that is why it is recommended to be sometimes a little bit more conservative (see last three paragraphs of the same "Resistance Corridor" post).

Now, by the end of the week many technical indicators remain positive by suggesting good odds for further up-move. Stochastics and RSI are above 70 and 80 lines respectfully. Advance/Decline volume and issues are positive as well. Money Flow indicators remains positive as well.

Despite all the positive indicators, there are two things that are worth paying attention to: high daily volume over the last two weeks and increase in volatility. The last two weeks of trading (starting from April 13, 2010) has been supported by high daily volume: huge volume surges during the April 13-15 up-move, even stronger volume surges on April 16 when indexes dropped down and still strong high volume surges during another strong up-move on April 17 - until now.

The second negative factor is an increase in volatility. As a rule increase in volatility suggests bearish mood and usually higher volatility is witnessed during a decline. This is not a good thing to see market rising on high volatility... At the current moment volatility raised to the level it was in January 2010 (during correction down). And increase in volatility on high volume during up-move is not very good sentiment...

Even technical analysis results suggest good odds of further up-move, because of high volume and increase in volatility, I would be very cautious. If volatility continues to grow or stay on the same level and we see sudden strong drops and strong bounces up, then I would expect to see a correction which could be stronger that the one we had in January 2010.

P.S. For monitoringVolume, Advance/Decline data and volatility for major US indexes and Exchanges (NYSE, S&P 500, DJI, Nasdaq 100, Russell 2000, etc) I would recommend visiting MarketVolume.com web site.

Volume and Advance Decline

I guess now, at the end of the week there should be no questions that the high volume surge may lead to the shift in supply demand balance and reversal. In current case, strong volume surge during the price up-move pushed the market into situation when those bullish traders who wanted to buy bought and the number of bullish traders who still wants to buy became too small to continue feeding price up-move. As I mentioned in my "Big Volume" post on April 14, 2010: "institutional investors decided to dump ... to bullish traders...". The number of dumped shares on April 13-15, 2010 was quite big and basically it changed the balance of bullish and bearish traders.

Of course, the one may say the market dropped down because of the "Goldman Sachs". I do not consider that this is the reason for the drop we had (unless institutional traders, who dumped on April 13-15, knew about this far ahead and they manipulated the market). Of course, it may amplified the decline, yet, it would not happened if the market would not be overbought. The market declines after high volume surge during price up-move. It has to decline to restore supply/demand balance. In the same way, the Google shares declined despite the record profit.

The media will always explains any market movement as a result of some news. Media sells news and if nobody relays on news then media will not be needed. That is why they do it. Personally, I do not build any trading decision on news releases. Following news release, on my opinion, is equivalent to obeying the commands of those who try to manipulate the stock market.

Coming back to strong decline we had on Friday April 16, 2010, I would say that it was not an ordinary decline. The decline was quite strong and volume during this decline was even stronger than the volume generated on April 13-15 during the price up-move.

As a rule, the stock market (when I mention stock market I assume main indexes: S&P 500, DJI and Nasdaq 100) does not crash suddenly, especially after prolonged in time advance. It is custom to see side-way trading and increase in volatility first. That is why I would assume that we may see the indexes moving back to their recent highs. The volume surge during the Friday's decline itself may push indexes higher. The third factor pointing to possibility of rebound up is critically low advance/decline volume and ratio reading on Friday 16, 2010.

Overall, we still may see some push down, however, I do not expect Friday's decline to grown into strong correction, at least not at this time.

Big Volume

Another day on the high volume - now, we may see it on almost all indexes. Still, the Russell 2000 index has the biggest volume surge.

I think something is going on. As you know, volume is always two side transactions and the number of sold shares is always the same as number of bought shares which is equal to volume. Price moves up because there are traders willing to buy at higher than the current market price. Big volume surge at high price means that somebody (who has huge number of shares – could be institutional investors) decided to dump those shares to bullish traders and fix profit.

Russell 2000 Volume

I usually do not post during the week. So, just a quick note for those who track indexes, especially for those who trade Russell 2000 index and its derivatives (Russell 2000 emini...):

Check the volume in the Russell 2000 sector over the last two trading sessions - I have not see something like that in the Russell 2000 sector since September 18-19, 2008...

S&P 500 Chart

Last week I have mentioned about side-way trading and waiting until upper or lower resistance lines is broken. Majority of indexes (including Nasdaq 100, S&P 500 and DJI) have run about their high levels (resistance levels) which were set in March, 2010.

The one may notice that even we had overbought signals, sometimes (as I mentioned a week ago) it is good to wait for a confirmation signals. The main indexes (nasdaq 100, DJI, S&P 500, etc) have run above their March, 2010 resistance levels and such move could be considered as a possibility of resuming up-trend. Only a few indexes remained in side-way action. Some of them are Nasdaq Biotechnology, Nasdaq Health Care, and Nasdaq Insurance (see my "Nasdaq Health Care" post). The strongest up-move has been seen in DJT (transportation) sector.

If a week ago technical indicators where mixed and some of them were pointing on possibility of down move, by the end of this week, most of them became bullish. Only some of the volume based technical indicators (see negative divergence on SBV Oscillator on the S&P 500 chart below) remain to indicate overbought levels.

Despite the fact that we may see big bullish volume accumulation, the volatility has drop to its lowest level. Last time such low volatility has been seen in the S&P 500 sector in 2007. The S&P 500 volatility (I refer to daily ATR – Average True Range) was at these levels in period from the middle of 2003 until the middle of 2007 (4 years). As a rule low volatility is an indicator of stability.

Below you may the S&P 500 chart with some technical analysis

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

Resistance Coridor?

Two weeks of side-way trading are behind (for some indexes it was a third week). As I mentioned last week in my "Nasdaq Health Care" post (March 28, 2010) "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."

I think, there is no question that we are at some resistance corridor. There should not be discussion that positive money flow since February 2010 has pushed stock market into overbought condition. The only question that could be placed now is where the market will go from this side-way trading. Will it go into a correction (which I consider would be healthy)? or will it continue to go up on ... positive unemployment report (nothing more positive comes to mind)???

One of the simplest strategies (that could be used in the current situation) is waiting for indexes (S&P 500, DJI andNasdaq 100) to break their resistance corridor lines. Over the last two weeks, the upper line of the resistance corridor could be drawn through March 25 and April 1, 2010 highs. If the indexes break this line on their up-move then we may start to think about resumption of up-trend. The lower resistance corridor line could be drawn through March 26, 20010 low. If the indexes drop below this line we may start to think about a correction down.

On my opinion, this is very simple (no complicated technical analysis has to be performed) and very conservative approach. The gap between upper and lower lines of the resistance corridor is only about 2%. Yes, the market has been in up-move for two months. Yes, the indexes are overbought. Yes, many mid-term indicators suggest good odds of correction down. However, I am not a follower of guessing the highest points to sell and lowest points to buy, especially in case of mid- and long-term trends where 1-2 percents are not as important.

There could be other strategies used to confirm the exit from the current sideway trading. Personally, in addition to the resistance lines, I would watch volatility (increase in volatility would indicate increase in bearish mood among investors) and money flow (in the current moment money flow is on the way to become negative).