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.