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.