Side-Way Trading

As I mentioned in the "S&P 500 Financial" post on August 20, 2010: "At this moment the majority of technical indicators remain to be bearish by suggesting the higher odds of further decline." - the indexes (S&P 500, Nasdaq 100 and DJI) are lower, yet if you take at the hourly chart (1 bar = 1 hour) you will see that most of the time the indexes were in side-way action.

Side-way characteristics of the current down-trend could be noticed from the beginning (August 9, 2010) of this down-trend. It is difficult to compare the current down-trend to the previous down-trends we had over the last couple of years. Te previous down moves where more consistent and had much less side-way trading sessions. It is already almost a month since the indexes in the bearish move and, so far, during the recent decline, we have not seen two strongly negative session in a row. Yet, mainly because of the side-way trading, we still have not seen panic trading which would be characterized by the strong bearish volume to the price down-side and strongly oversold advance/decline issues and volume readings.

The other characteristic of the current down move is the high level of volatility. The volatility is not extremely high, yet it remains steady on the high level.

The same a s a week ago, I would say that the majority of technical indicators remain to be bearish by suggesting the better odds of the further decline. Yes, the Friday's advance has pushed some technical indicators into bullish sentiment and if you take a look at shorter-term technical analysis you may see some bullish signals. However, in order to have a strong up-move, in addition to the bullish signal, the stock market should be predisposed to the up-move. So far, we may see bullish signals on shorter-term frames, yet, personally, I have not seen any strongly oversold indications. Therefore, I would not place a long bet.

S&P 500 Financial

Last week in the "Volatile Markets" report (on August 15, 2010) I stated: "I would say that the odds of the further decline are higher. However, taking into account volume surges and low advance/decline reading on August 11, the one who is in short may consider setting a stop loss to protect a profit already earned since the time when August 6’s lows were broken.... the volatility level is still high, which means that we may see sudden and strong reversal, therefore it could be recommended to monitor charts daily.". The stock market continued to be volatile: we had strong bounce up on August 17, 2010 and then continuation of decline on August 18-20, 2010. By weekly results the indexes (S&P 500 and DJI) moved lower. The exception was the Nasdaq 100 index which stayed above its August 16's Low.

The Nasdaq 100 index was less bearish than other indexes, which could be explained by high bearish volume surges during the decline on August 10-12, 2010. The S&P 500 and DJI indexes did not have such strong bearish trading activity in that period, therefore they were more bearish.

At this moment the majority of technical indicators remain to be bearish by suggesting the higher odds of further decline. However, I would like to drag your attention to the S&P 500 Financial index. If you take a look at this index you will see extremely strong bearish volume over the past two week. We have not seen such strong bearish trading in the financial sector since October 2009. This volume explains that there are many traders in panic of double dip reception (widely advertised all over the news), with fresh memory of crash in the financial sector, who are trying to pull funds out the financial stocks while other (I believe institutional traders) are buying from them in huge volumes (because those stocks most likely still under-priced).

Because of this strong bearish volume in the S&P 500 financial index I may assume that we could be closed to the bottom of the recent correction. Yet, it would be nice to see strong oversold signals first in the S&P 500 and DJI indexes - so far we have not seen strong bearish volume on these indexes on daily charts,

Volatile Markets

I mentioned a week ago in the "Trading strategy" post on August 8, 2010: "even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used.... If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears." - this is exactly what happened on August 1, 2010 - the lows were broken and the indexes continued to decline.

Now, majority of technical indicators are bearish and suggest good odds of further decline. Yet, as it always happens in case of technical analysis - there is always something that points in opposite direction.

In the current situation, on August 11, 2010, the strong decline has generated great bearish volume surge. In addition, on that day we had extremely low advance/decline volume and issues readings. If we compare August 11 to July 16, we will see that even smaller bearish volume has pushed indexes up. Furthermore, there is still a possibility that this volume may cause up-move. At the same time, from the bears prospective of view we may say that volume and advance decline signals on August 11 were too close to the recent highs to consider them as strong bullish signals. Another point is that even we had extremely low (extremely oversold) advance/decline reading in the S&P 500 and DJI sectors, the NYSE composite advance/decline volume was not even strongly oversold - yes, it was bearish but not strongly.

Overall, I would say that the odds of the further decline are higher. However, taking into account volume surges and low advance/decline reading on August 11, the one who is in short may consider setting a stop loss to protect a profit already earned since the time when August 6’s lows were broken.

Another aspect that should be considered (on my opinion) is that the volatility level is still high, which means that we may see sudden and strong reversal, therefore it could be recommended to monitor charts daily.

P.S. It does not looks like we have quite summer vacation trading...

Trading Strategy

On July 31, 2010 in my "Volatility" post I mentioned "Overall, I would say that you may find a number of technical indicators that suggest possibility of up move. My technical analysis tells me that this possibility exists as well, yet, so far, I do not see the indexes gonging higher their June 21st and July 27th highs." Taking look back at the past week, we had relatively quiet and side-way trading with exception of strong up move on Monday's morning and strong swing down and up on Friday. The S&P 500 index stuck in side-way action exactly at its high seen on June 21st, 2010; the Nasdaq 100 index - a little bit below and the DJI index a little bit about.

Now, by analyzing indexes I would say that the situation is mixed at this point. From one side on the longer-term charts we have decrease in volatility which would suggest the possibility of up-move. From other side we started to see negative divergence on many technical indicators - when price moves up and makes new high, yet an indicator either moves side-way or moves in opposite direction.

If I would analyze all technical indicators I would say that, because of the side-way trading over the last 5 days, 50% of technical indicators are neutral and could be interpreted either as bullish or bearish, 25% of indicators are bullish and the rest 25% are bearish. The one may ask how a trader can make a decision in such situation. The main challenge of technical analysis that the stock market never gives you 100% clear signals. There are always some technical indicators that favor up-move and some technical indicators that favor bearish trading. The challenge is to define what indication is more important at given period of time.

In the current situation, even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used. Every side-way trading defines upper and lower lines of side-way corridor. If upper line of side-way corridor (high on August 4) is broken - odds would favor bullish trading. If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears. Until then conservative approach on my opinion would be to remain in cash.