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.