Monday, July 5, 2010

Technical Analysis

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A week ago, on Monday June 28, 2008 in the "Nasdaq 100" post I have wrote "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'." On the next trading day we had a strong continuation of the decline.

Now, when the indexes dropped about 15% from the April's top (16% on the Nasdaq 100 and S&P 500 and 14% on the DJI)  and about 9% in the last run down from the June 21st High (11% on the Nasdaq 100, 10% on the S&P 500 and 9 %  on the DJI) it could be a good time to look at the technical indicators to see what technical analysis suggests.

There are several points that I would like to focus on:

  • The Nasdaq 100 index  had 10 negative trading sessions in a row;
  • We had extremely low advance/decline sentiment readings on June 29, 2010;
  • We had increase in daily volume during decline on June 29 and July 1, 2010;
  • Starting from July 1st we ma see change in the money flow direction - it is negative, yet it moves toward positive area;
  • Many technical indicators, including RSI, Stochastic, MACD and others, are showing positive divergence when the price makes new lows yet an indicator does not makes new low and in some cases even moves up.

By summarizing all of the above I could say that my technical analysis suggest the the stock market could be considered oversold on this stage (predisposed to the reversal). We had strong move down, we had oversold advance/decline readings, high volume on June 29 - July 1 suggests that panic selling hit many traders and number of sellers should be not as big as it was a week ago.

Taking into account that the DJI and many other indexes are at the bottom of the historically defined longer-term side-way corridor (see charts in my previous "DJI" post) I would assume that we may see a bounce up. At this moment, I would not try to guess whether it could be just a small bounce or a strong recovery toward April's highs. There are still a few factors that make me cautious: one is that the volatility is still high and second is that I would expect to see stronger increase in the volume after such deep drop.

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