Nasdaq 100

Last week in my "Too Far Too Fast" post (on June 20, 2010) I have mentioned following "The trading volume over the past week was low (actually regular) which would not indicate greedy buying. I do not want to tell that this is the end of the recovery. We may see some drop down and then further run towards new highs. There is a possibility of such scenario and technical analysis points to that at this moment. However, if "big money" do not believe in strong recovery, for me it's difficult to believe in it either. Furthermore, I would be cautious and monitor stock market sentiment more closely."

It looks like not just me but the stock market in whole did not believed in strong recovery - starting from June 21st (on the next day after my post) we have been moving down.

If you take a look at the daily index charts (Nasdaq 100, S&P 500, DJI, etc) you may notice that the recent move down was relatively quiet. We did not have extremely low advance decline sentiment readings, we did not have increase in volatility and we did not have substantial increase in volume. In summary we may say that 4-5% drop over the past 5-6 trading session did not generate any panic on the stock market and this is not how a down-move usually ends.

If you take look at history - check the volume at the bottom of down move in the begging of October 2009, at the end of October 2009, in January-February 2010 and most recent on May 19-21 and on June 4-9 - you will see that all moves down are marked at the end by a strong increase in volume (volume surge). The current move down did not bring a lot of additional volume. We had only small increase in volume on June 24-25 and we have basically side-way trading since then.

Mainly because of the steady volume, it is difficult for me to believe that the current side-way trading may grow into a recovery. Majority of technical indicators continue to remain bearish. The Nasdaq 100 is maybe the only index that shows some small oversold condition. The disturbing thing for me is quiet trading (no increase in volatility during the recent decline). It sounds like a "silence before storm".

Too Far Too Fast?

There were good positive signals last week (see the "Is it Recovery?" post on June 13, 2010) and we had positive trading this week. I guess, now (as there always was, is and always will be) the same traditional question is "What is the next?"

By summarizing cons and pros of mine technical analysis I may say that the longer-term technical indicators suggest possibility of further recovery and shorter-term technical indicators point to a possibility of move down.

From one side we had a strong correction and it would be logical to see a strong recovery. From other side there are worries about Europe and, as I already mentioned before, the stock market run "too far and too fast" in period from March 2009 until April 2010 (CheckS&P 500 and Nasdaq 100 charts). The U.S. economy did not do as well as the Wall Street. I would consider that there could be a possibility that the market was pushed too far up by big institutional traders (hedge funds and big guys) - the same as during the stock market crash the market was (on my opinion) pushed down too far by the same "fellows".

From the technical analysis prospective, as I mentioned above, the longer-term indicators suggest possibility of further up-move. We may see positive money flow, volatility slowly declines, etc. The only thing that bothers me is that I have not seen high volume at the beginning of the current recovery. High volume at the beginning of a recovery usually suggests that the big institutional traders (those who run the market) expect strong up-move and do not mind invest into the market which is on the rise from the recent support. The trading volume over the past week was low (actually regular) which would not indicate greedy buying. I do not want to tell that this is the end of the recovery. We may see some drop down and then further run towards new highs. There is a possibility of such scenario and technical analysis points to that at at this moment. However, if "big money" do not believe in strong recovery, for me it's difficult to believe in it either. Furthermore, I would be cautious and monitor stock market sentiment more closely.

Is it recovery?

By following my last week post (see "Another Crash" post on Sunday June 6, 2010) we had two days of decline (Monday-Tuesday) and then after the indexes (S&P 500, DJI, Nasdaq 100, etc) hit the May 25's lows they reversed and recovered.

Now, when the indexes are at their June 3rd high levels (S&P 500 and DJI, Nasdaq 100 is lower) the question could be asked whether we see bounce from these levels down and continuation of downtrend, or the indexes will continue to recover. To answer on this question, I think we have to take a look at higher timeframe charts.

By looking at 1-year and higher timeframe charts I may say that starting from the beginning of June, I may see slow change in the money flow. The same tendency could be seen in the sentiment defined by the  group of the Advance/Decline (breadth) indicators. This is a good point and would suggest that we may see a recovery toward May 12th highs.

The second positive sign is that the correction down (the market is right now) is quite strong. We had very strong bearish volume surges and we had strong oversold readings on many technical indicators. So, from the technical analysis point of view the stock market could be considered oversold which mean that it has a potential (the money that were pulled out from the market could be injected back) to go up.

The third positive point is that the trading volume is lower which could suggest that the period of panic actions could be over. The indexes did not drop below the bottom marked on May 25th and we did not see any strong bearish volume during June 4-8 decline. This is good and if we continue to see market going up easier (on weaker signals) then going down (on stronger signal) it could indicate that period of worst is over (at least for some time).

Still, the biggest negative sign is high volatility level. Starting from the end of May volatility did not increase, yet, it has not became lower as well. This suggests that even if we see a recovery toward May 12th high, if we do not see decline in volatility, it could be just a temporary recovery before other correction.

Another Crash

As I mentioned in my previous post (see "Short Technical Analysis" post on May 31, 2010) "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."  - we had side-way volatile trading at the beginning of the past week with strong decline on Friday, June 4 of 2010.

The Friday's decline wiped out almost all gain of the past two weeks. Now we are getting close to the May 25th bottom.

As with majority of the strong declines, the indexes (Nasdaq 100, NYSE Composite, DJI, S&P 500, etc) have generated strongly oversold signal: strong increase in volume during decline (volume surges) and extremely low Breadth (advance/decline) indicators readings. From one side these oversold signals indicate panic selling and possibility of shift in supply and demand balance which could lead to a bounce up.

From other side, we had too many similar signals (7 by my count) over the past month. In majority cases we had bounce up after such signals, however, all of them were short lived and the indexes are still at the bottom. Another negative factor is the high volatility level. We do not see a decline in volatility which tells that the stock market continues to be very sensitive and we may see any time other strong declines.

It is difficult to believe that we are going to face another stock market crash or strong recession. I would rather say that in period from March 2009 until April 2010 the stock market went too far and too fast (it was driven by institutional speculators and not by economy). The economy does not develop so fast and now it could be a time to level it up.