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Another mixed week. The S&P 500 and DJI indexes moved higher while the Nasdaq 100 moved in side-way trend in which this index has been since September 24, 2010 (right now only a few points higher). The S&P 500 an DJI indexes were mostly traded side-way (since September 24 as well) with exception of the strong rally on October 5, 2010. Currently, the Nasdaq 100 index moves at its high levels seen in April 2010. The S&P 500 and DJI indexes are still 2-3% below their April's highs.
Below I have posted daily chart (1 bar = 1 hour) of the S&P 500 index with plotted Nasdaq 100 index (orange line).
The technical analysis on the chart above is applied to the S&P 500 index. The DJI daily chart would give quite similar picture. The Nasdaq 100 daily chart would be slightly different , with a little bit more bearish sentiment.
By summarizing the indicators above I may say that the longer-term positive divergence on the SBV and advance/decline oscillator is a good sign from the longer-term prospective. However, there are several negative signals at the current moment:
- the SBV is still at high positive levels and is moving sideway. Even bullish volume accumulation could be considered quite strong and would indicate oversold index's condition, the Money Flow is still positive on the S&P 500 and DJI (not on the Nasdaq 100). Until we have positive money flow there are always will be good odds of up-move
- Advance/decline volume and issues ratios and McClellan Oscillator are moving sideway after being at high levels. This suggests that if in September we had traders buying advancing stocks then, right now, there are not as many traders focused on the positive stocks as before. The number of traders focused on the declining stocks is about the same as the number of traders that are trading rising stocks. This shift from trading positive stocks suggest that many traders switch into bearish mood and if this tendency continue we may see more traders in bearish mood.
- We have a signal on the MVO. This suggests an increase in bullish volume (bullish volume surge). As a rule such increase in volume during price advance may lead to the shift in supply demand balance (when power of buyers become existed) with further reversal down. However, if you scroll the history you will see that usually reversal occurs when MVO returns to zero.
- The biggest concern on my view is an increase in volatility. The volatility is up since its low readings in the middle of September 2010. This is not normal. I have not see a lot of periods in the history when indexes moved up on rising volatility. The volatility is not too big to be considered strongly bearish, however the fact that is up from its low readings suggests nervous and uncertain trading, which is usually seen during down-moves.
Overall, I would say the the indexes could be considered predisposed to move down and we already may see some bearish signals. Which is logical when the indexes are at their Aprils highs. After a month of positive trading we may expect quite strong reversal. However, until wee see some negative money flow it could be too risky to play on it. If correction down meant to bee strong then there is no need to play at the top. More conservative approach would be wait for conformational signals and ply confirmed trend.
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New day - new data - new view on the market. In similar to September 30h way we had strong opening. Index futures traders have pushed the indexes up before the bell, yet, in opposite to September 30th way this time positive sentiment on futures market was supported by positive move on the stock market and indexes continued to move up.
As I mentioned above, new day brought new data that on my opinion attention should be paid to:
- we had very strong volume during today's run up. The strongest increase was seen in the financial sectors (see Nasdaq Financial and S&P Financials). NYSE daily volume is the highest daily volume since July 16, 2010. Nice volume increase was seen in the S&P 500 and DJI sectors. However, the Nasdaq 100 index volume was not as high;
- we had very extremely strong bullish advance/decline readings;
- we have further increase in volatility on daily charts;
- S&P 500 and DJI broke their high levels seen on September 30, yet the Nasdaq 100 index stayed below its high.
High volume means big players are in the game. The question is what they are doing - are they selling at high (indexes are at their 5-nmonth highs) to greedy buyers and to short players whose stop-losses were hit when indexes opened strongly up. Or they are buying at high because they have information that assures them that the market will go up without any correctional move down??? I do not think retail traders could be selling in such amounts. However, there could be other big players who decided to play short at high - in this case this is a battle between giants and we should see who wins when we see volume down.
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Some positive signals
In summary, I would say that that technical analysis suggests that the market is predisposed to move down. Some indexes and market sectors are already in decline, yet, main market indexes are still at the top. My opinion is that we may face bearish trend, yet I could be wrong. If the market is predisposed to move down it does not necessary mean it will go down - we still may see side-way trading. A conservative trading strategy could be waiting for confirmation signals before investing.
P.S. Some interesting quote from the news - something negative that is not strongly highlighted in the media: "Regulators on Friday shut down three Georgia banks and one each in New Jersey, Ohio and Wisconsin, boosting to 125 the number of U.S. bank failures this year … The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007."
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Seven trading sessions in a row the Nasdaq 100 have been positive. The rest of the indexes are forth session in a row in the side-way move. Intensity is growing...
Advance/Decline ratios on the S&P 500 and DJI are already negative...
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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.
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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...
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By following my "Index Trading" post on July 10, 2010 where I wrote "In summary I would say that I see number of factors that favor further up-move." we basically saw positive trading at the beginning of this week.
Then in my "Increase in Volume" post on July 13, 2010 I stated "At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week." and then in my "Nasdaq 100" post I mentioned "Yet taking into account increase in volume I may expect a slow down of the current recovery, and at leas a side-way trading - then we may see how it develops.". As it happened, we had 2 trading sessions of side way trading (July 14-15, 2010) and then strong decline on the last day of the week (July 16, 2010).
Now, the main question is whether the stock market (Nasdaq 100, S&P 500 and DJI) indexes will continue their drop, or there could be other scenario. Below, I tried to summaries some points that on my opinion may help in understanding possibilities of further trend development.
All four points above would recommend that this is could be logical healthy drop down to release some overbought pressure collected over the 8 positive trading sessions in a row on the Nasdaq 100 ( 7 positive sessions on DJI) and now, even we could have some further decline the odds could be good that we may see indexes back to their June 13-15 high levels.
The Bearish points are:
Leading indicators (volume and advance decline based technical studies) signal that the stock market (indexes) is predisposed to bounce up. However, most of the lagging technical studies (price based indicators) are bearish. The high volatility is very important factor on my point. Because of high volatility we may see strong and sudden changes in a trend when most of the technical indicators (due to a lag) would generate signals when it's too late to open/close position. High volatility also suggest that the market is still weak and even if we see bounce up, if the volatility does not go down, there will be a possibility of developing of another down-move.
Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.
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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:
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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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".
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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.
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The indexes did not bounce up (as I expected) after extremely lowadvance/decline readings seen on May 14, 2010. Last week I listed bad and good things, on my opinion, and if we compare the previous week decline with the recent week decline we may say that the difference is that the decline on May 20, 2010 was supported by big bearish volume surges. High volume surges during such decline are a very good sign to support extremely low advance decline reading.
Overall, there are several very strong signals as I see:
1. Extremely low NYSE Composite and S&P 500 advance decline readings on May 20, 2010 would suggest strongly oversold condition and possibility of up-move.
2. High volume on May 20-21, 2010 suggests that many investors started to buy attracted by low priced stocks.
3. On May 21, 2010 we may see change in the money flow toward bullish side.
4. McClellan Oscillator became positive which suggests that majority investors are focused on the advancing stocks.
5. The biggest positive signal for me is price's behavior on May 21, 2010. The indexes (Nasdaq 100, S&P 500, DJI and others) started session strongly down, during the first five minutes of trading they generated huge trading volumes and then on low volume the price went up. That tells me that the market went down to kill stop-loss orders and then when all stop-losses orders were eaten the price went up because of luck of bearish traders.
There is only one thing that on my opinion is not very nice - is a big number of low advance /decline reading over the short period of time. This is not a very good sign. Even if I am right and we will see a recovery, I would be very cautious and I would watch that recovery closely.
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Overall, we had quite a positive week with the exception of the last trading session on Friday May 14, 2010 when indexes declined strongly: S&P 500 - 1.85%, Nasdaq 100 - 1.97%, DJI - 1.49%, NYSE Composite - 2.15%, etc.
The good news is that it was not 3% or stronger (as we had before) decline and biggest part of trading session on Friday was in side-way range. The bad news is that it still was a strong decline and it pushed volatility trend up again.
Let's take a look at the Friday's decline from the prospective of my technical analysis and what I would expect to see. I emphasize on my and I because it is my personal opinion and my personal analysis which may not necessary goes along with analysis of other "professional" traders, investors and or advisors. I always recommend (before relaying on anyone's analysis or recommendations) checking the charts and doing some analysis by yourself and only then you can create your own opinion which may be based on the analysis results of others or may not. But it will be your opinion and at the end you will be investing your money.
Below I tried to summaries negative and positive aspects of Friday's decline and how it possibly may affect future trend.
Overall, at this moment I base my technical analysis on the advance/decline data. Because of the low advance decline readings we had on Friday May 14, 2010 I would expect to see the indexes higher than where they are now. Yes, we still may see some decline, yet, on my opinion market has to bounce up. Then, depending on how strong and volatile the bounce is, I would build my further technical analysis.
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When the market goes down it triggers stop-losses set by traders. The job of a broker is to close a position when stop-loss order is triggered. A broker does not have to close a trader's position at stop-loss price - a position should be closed at any available price. Still, under usual circumstances if a stop is hit a position is closed at stop-price. However, if a big number of stop-loss orders are hit in a short time span and brokers have to close position of many traders and sell billions of shares and there are no enough buyers for these shares than those shares crash down until they are price low enough to attract buyers to buy them. That is how market may suddenly crash and that what most likely happened on Thursday May 6, 2010.
Now from technical analysis prospective we have strongly oversold volume and advance/decline signals. You may see very strong bearish volume surges in all market sectors: in NYSE, S&P 500, Nasdaq 100, DJI, etc. Actually, NYSE Composite trading volume on May 6, 2010 is the highest daily volume since October 10, 2008. At the same time you may see strongly oversold advance/decline readings on the NYSE Composite and S&P 500 indexes on May 6-7, 2010.
There is no doubt that the market has become strongly oversold during the recent crash down. There is enough oversold power to push indexes strongly higher and I would expect to see this move. However, majority technical indicators remain bearish indicating bearish mood among traders. In this case it could be good idea to wait at least for a few signals that would confirm a reversal. Personally I would be looking for decrease in volatility and change in the direction of the money flow.
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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.
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