Short Technical Analysis

Overall, the past week was positive on the market (see my "Volume and Money Flow" post on May 23rd, 2010). The only negative thing was the strong negative opening on Monday, May 24 of 2010. The first fifteen minutes of trading on that day were extremely bearish. Basically, because of these 15 minutes of bearish trading, the indexes (Nasdaq 100, S&P 500, DJI and other are only modestly higher than the previous week close on May 21, 2010.

This week I'm not as bullish as I was last week. Yes, taking a look at the longer term chart, the odds are good that we may see a recovery to the higher levels. However, on shorter-term charts we may see some bearish signs

What exactly makes me worry is that the volatility remains at high level and that many technical indicators (Money Flow indicators, Breadth Indicators, Stochastics, RSI, etc) on the hourly chart have turned into bearish.

Another thing that makes me worry is that during intraday trading at the end of the session on May 26, 2010 we had strong bearish volume surge. For short-term frame this volume was quite strong, however we did not see strong up-side reaction on that bearish volume. Only one day (on May 27, 2010) we had bullish trading. If we do not see up-side reaction on that volume tomorrow or the day after tomorrow then I would consider a possibility of retesting the Lows seen on May 25, 2010.

Volume and Money Flow

The indexes did not bounce up (as I expected) after extremely lowadvance/decline readings seen on May 14, 2010. Last week I listed bad and good things, on my opinion, and if we compare the previous week decline with the recent week decline we may say that the difference is that the decline on May 20, 2010 was supported by big bearish volume surges. High volume surges during such decline are a very good sign to support extremely low advance decline reading.

Overall, there are several very strong signals as I see:

1. Extremely low NYSE Composite and S&P 500 advance decline readings on May 20, 2010 would suggest strongly oversold condition and possibility of up-move.

2. High volume on May 20-21, 2010 suggests that many investors started to buy attracted by low priced stocks.

3. On May 21, 2010 we may see change in the money flow toward bullish side.

4. McClellan Oscillator became positive which suggests that majority investors are focused on the advancing stocks.

5. The biggest positive signal for me is price's behavior on May 21, 2010. The indexes (Nasdaq 100, S&P 500, DJI and others) started session strongly down, during the first five minutes of trading they generated huge trading volumes and then on low volume the price went up. That tells me that the market went down to kill stop-loss orders and then when all stop-losses orders were eaten the price went up because of luck of bearish traders.

There is only one thing that on my opinion is not very nice - is a big number of low advance /decline reading over the short period of time. This is not a very good sign. Even if I am right and we will see a recovery, I would be very cautious and I would watch that recovery closely.

Advance Decline Analysis

Overall, we had quite a positive week with the exception of the last trading session on Friday May 14, 2010 when indexes declined strongly: S&P 500 - 1.85%, Nasdaq 100 - 1.97%, DJI - 1.49%, NYSE Composite - 2.15%, etc.

The good news is that it was not 3% or stronger (as we had before) decline and biggest part of trading session on Friday was in side-way range. The bad news is that it still was a strong decline and it pushed volatility trend up again.

Let's take a look at the Friday's decline from the prospective of my technical analysis and what I would expect to see. I emphasize on my and I because it is my personal opinion and my personal analysis which may not necessary goes along with analysis of other "professional" traders, investors and or advisors. I always recommend (before relaying on anyone's analysis or recommendations) checking the charts and doing some analysis by yourself and only then you can create your own opinion which may be based on the analysis results of others or may not. But it will be your opinion and at the end you will be investing your money.

Below I tried to summaries negative and positive aspects of Friday's decline and how it possibly may affect future trend.

• Advances and Declines: We had extremely low NYSE Composite and S&P 500 Advance/Decline reading as a rule such low readings suggest strongly oversold condition and in most cases we may see strong bounce up after this. This is a good sign and we may see bounce up and recovery to the April’s high levels and even higher.
  
  The bad thing about it is that this is fifth occurrence of such low advance/decline readings over past one-month period: on 4/16/2010, on 4/27/2010, on 5/4/2010, on 5/7/2010 and on Friday 5/14/2010.
  
  After April 16, 2010 we had 5-session up-move; after 4/27/2010 2 days of strong recovery; after 5/4/2010 no bounce up and after 5/7/2010 we had 3 days of strong up move. Now after 5/14/2010 low advance/decline readings I would expect to see bounce up as well. Yet, the bad thing is that we witnessed too many such low advance/decline readings within short period of time. Usually it happens at the bottom of down-trends or before begging of a long-term downtrend. Such frequent occurrence of low advance/decline readings in many cases is considered as a pre-signal of possible radical changes in the longer-term trend.
  
  I do not want to scary anyone that we are on the edge of new stock market crash. As I mentioned above, it could be played both ways. Personally, I would expect to see the indexes moving up to the April's highs and even higher, however, if this is not the case then I would be very cautious about longer-term trend.
• Volatility: Volatility on daily charts (1 bar = 1 day) continue to remain at high level. Volatility is not moving up which is good, however it does not decline which is not good (it moves sideway). I already mentioned several times in my previous posts that I would like to see a decline in volatility and only then I would be more bullish.
• Volume: Friday's decline did not generate strong bearish volume surges. From one side the indexes do not need strong bearish volume surges to move higher, because we already had very strong bearish volume surges during the decline on May 6-7, 2010. From other site it still would be nice to have some bearish money flow accumulated during that decline.
• Other Technical Indicators: Other technical studies (Stochastics, RSI, MACD, etc) are mostly bearish by suggesting possibility of further slide. However, I would count on the fact that majority of them are lagging indicators (signal changes in a trend after it happen) and taking into account current high volatility level we may see sudden and strong change in a trend and the sentiment could be changed very fast from currently bearish into bullish.

Overall, at this moment I base my technical analysis on the advance/decline data. Because of the low advance decline readings we had on Friday May 14, 2010 I would expect to see the indexes higher than where they are now. Yes, we still may see some decline, yet, on my opinion market has to bounce up. Then, depending on how strong and volatile the bounce is, I would build my further technical analysis.

Volatility still Up

As expected, we had a strong bounce up from the oversold levels.

I will be short:

Today's rally up is logical reaction on high volume surges during May 6-7, 2010 decline.

The good news is that today's trading session daily volume on all indexes (NYSE Composite, Nasdaq Composite, S&P 500, DJI, etc) is lower than the daily volume we had on May 6-7, 2010. We may see changes in the money flow toward positive readings. Many technical indicators became bullish suggesting a possibility of further recovery.

Not very nice news is that the volatility remains on high level and still is raising. Today's advance was quite strong - we have not see such strong daily gain since 2008th stock market crash. Because of that, Even I consider that the odds on the side of up-move, I would be very cautious and I would not be strongly bullish until I see some decline in volatility.

Oversold?

When the market goes down it triggers stop-losses set by traders. The job of a broker is to close a position when stop-loss order is triggered. A broker does not have to close a trader's position at stop-loss price - a position should be closed at any available price. Still, under usual circumstances if a stop is hit a position is closed at stop-price. However, if a big number of stop-loss orders are hit in a short time span and brokers have to close position of many traders and sell billions of shares and there are no enough buyers for these shares than those shares crash down until they are price low enough to attract buyers to buy them. That is how market may suddenly crash and that what most likely happened on Thursday May 6, 2010.

Now from technical analysis prospective we have strongly oversold volume and advance/decline signals. You may see very strong bearish volume surges in all market sectors: in NYSE, S&P 500, Nasdaq 100, DJI, etc. Actually, NYSE Composite trading volume on May 6, 2010 is the highest daily volume since October 10, 2008. At the same time you may see strongly oversold advance/decline readings on the NYSE Composite and S&P 500 indexes on May 6-7, 2010.

There is no doubt that the market has become strongly oversold during the recent crash down. There is enough oversold power to push indexes strongly higher and I would expect to see this move. However, majority technical indicators remain bearish indicating bearish mood among traders. In this case it could be good idea to wait at least for a few signals that would confirm a reversal. Personally I would be looking for decrease in volatility and change in the direction of the money flow.

S&P 500 Chart

Below you may see the S&P 500 index chart as a follow-up illustration to my previous "Stock Market Crash" post. Blue bars on the chart represent volume of the S&P 500 index. Increase in volume is very clearly seen at the end of April 2010, as well as huge volume on May 6-7 during the crash. The chart is taken from www.marketvolume.com

Chart #1: The S&P 500 of stock market crash in May 2010

Stock Market Crash

The stock market crash on Thursday May 6, 2010 is quite interesting. Someone may even call it very suspicious by the following reasons:
1. It happened when market was already in decline.
2. The indexes dropped to the lows seen in February 2010 - where the majority of stop-losses were set (support levels always were sensitive for many professional and retail traders).
3. It looks like somebody new that something has to happened and that somebody fix profit in the second half of April 2010 - see high volume surges in that period at the resistance.
4. The huge number of stop-losses were traded and somebody bought them - see huge volume during the crash on May 6 - 7, 2010.

Isn't it suspicious that somebody was fixing profit in huge volumes in the April and than we had "human or computer error by accident" and then somebody was buying in huge volumes during the crash...

I think that, now, after "Goldman Sachs Scandal" everybody knows that it is "OK" for a broker to trade against it's clients. I'm just wondering: is it true that brokers know where the majority of stop-losses of their client-traders are set?

When the Government set a new Law for Credit card Companies, before that Law took affect, almost all credit companies raised rates and introduced additional various fees. When The Government pass Health Care Bill  by which pre-existing condition should be treated, some insurance companies started to through out clients who have pre-existing condition before the new Law is in force. Now, the Government is working on the Wall Street Bill, I am wondering how Wall Street will do the last days of its freedom???

All the above are just guesses and we, simple people and simple traders, will never know what really happened. However, what we can do is to monitor through volume the action and manipulation of big  institutional traders. The first rule is that if you see increase in volume that means that the big traders are in action. If you may spot it then you may try to interpret it and build your trading strategy accordingly.

P.S. Tomorrow I'll try to post some technical analysis points and my view on possible further trend development.

Market Crash

Very nice volume we had today during the crash. It does not matter what was the reason, "computer glitch" or Greece crisis, the market hit down eat, all stop-losses and when there were nothing more to eat it bounced strongly up. Such strong volume means that the institutional traders were buying from those who placed stop-loss orders. All this high volume mean that, now, most likely we have oversold condition when we may have luck of bearish traders to support further decline.

It was crazy day, It was almost impossible to buy (many orders bounced back canceled), still, I like it, because such huge volume surges are clear signals of possible reversal. We still may see some volatility and maybe some decline, yet, I would expect to see the indexes (DJI, Nasdaq 100, S&P 500 and other) moving up.

I'll try to post my view of a "computer glitch" during the week-end.

Greece with Media versus Volume and Technical Analysis

Very nice day. If you take a look at my Sunday's post (See "Volatility" post on may 2, 2010) and you will understand why I am in a good mood.

In my Sunday's post I wrote "Taking into account volatility, I would assume that the odds are on the side of the development of a correction down. Big bullish money flow since the end of February 2010 has pushed the stock market into overbought condition and it is in the favor of correction down." and it could look skeptical yesterday, yet, today it is completely another story.

It was interesting to watch financial news today. News always can find an "explanation" of event. If the market goes down the media states that investors are disappointed by FED keeping rates unchanged (if the rates stay unchanged it tells that the economy cannot afford higher rates). If the market goes up media states that investors are happy that FED keeps rates unchanged (low rates stimulate economy). There are always bad and there are always good news on the stock market. Media's job is to pick up news that fit the current market movement, which should not be very difficult, especially taking into account that it is done after the fact. In this way they always look smart and professional and they are "never wrong".

Today media blame Greece financial situation about stock market drop. Common, Greece has been all over the media over the last half of year and state that investors became worried about Greece today (not yesterday and not a month ago) is funny.

The market went down because it was overbought. Over the last two weeks I repeatedly mentioned about increasing volatility and high volume as an indication of coming changes. Whoever (from big institutional investors) was worried about "Greece" have left the market within the last two weeks. If you check the index volume (NYSE volume, S&P 500 volume, DJI volume and especially Russell 2000 volume) you will see it clearly. Now we see only a result of institutional traders' actions over the past two weeks.

P.S. Volume indicators continue to be my favorite tools in technical analysis.

Volatility

During the week I had an unscheduled post. Something that I do not usually do, yet signals were very nice. I mentioned there: "suggest bounce up which could be similar to the one we had after decline on April 16, 2010 ... there will be a reaction ... 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." (See "Volume, Advance Decline and Volatility" post on April 27, 2010).

We had bounce up. It was not as strong and not as prolonged as the bounce after April 16, 2010, however up-move on April 29, 2010 was quite strong and many indexes (Nasdaq 100, Dow Jones Industrial, S&P 500, etc) bounced up, close to their highs seen on April 26, 2010. The current bounce up could be considered very nice from the "Correction" point of view. The reaction on high bearish volume surge and oversold advance/decline readings (seen on April 27, 2008) was strong and short-lived (indexes bounced down on April 30, 2010) - in other words - very volatile. Overall, the past week have added to the volatility and right now the volatility level is quite bearish.

In general, since April 12, 2010 the stock market could be considered in the volatile side-way move. Taking into account volatility, I would assume that the odds are on the side of the development of a correction down. Big bullish money flow since the end of February 2010 has pushed the stock market into overbought condition and it is in the favor of correction down. Many of technical studies point to correction as well. I think, if the indexes go below lows seen on April 28, 2010 it could be as another confirmation of correction.

There is only one thing that makes me cautious - this is high volume during the side-way volatile trading that we have been seen since April 12. It looks like there are two big institutional forces fight each other: one institutional "big money bag" is trying to push market down by selling at high levels and another institutional "big money bag" starts to buy in huge volumes as soon as indexes drop a few percents down. Big volume always indicates actions of big players, and there is no doubt (for me) that now, we see in actions these big players. However, if before they were playing together, it looks like now they are playing against each other. It difficult to say who from them will win, yet it looks like, since Friday’s decline was on lover volume, that bearish traders are taking over.

It is difficult to recommend anything right now. You cannot set tight stop-loss in such volatile market - it could be eaten very easily. The only thing I may recommend is watching technical indicators, review your position at least on daily basis and adjust it in accordance to new coming volume, volatility and advance decline data.