Dow Chart

Last week (see my "S&P 500 Technical Analysis" post on January 4, 2009 ) I mentioned of a danger that could come from high volume expressed in high MVO in period from December 30, 2008 until January 2, 2009. At the same time I mentioned that I would expect to see a few flat session before the market may reverse. This exact scenario was played last week: Monday - Tuesday we saw almost flat market which pushed previously bullish technical indicators into bearish and neutral. If on Friday, January 2, 2009 my technical analysis was bullish, then by the end of the trading session on January 6, 2009 the same technical indicators on all three indexes I track (Nasdaq 100, DJI and S&P 500) were bearish (see chart below): SBV, MVO, Advance/Decline Oscillator and McClellan Oscillator - Bearish; MACD, Stochastics and RSI - from neutral to Bearish. As a result the rest of the week we had down market.

Now, at the end of the week my technical analysis still points me to the dominance of the bearish sentiment on the stock market: SBV is still moving down; Stochastics and RSI are still below 30 and 20 levels respectfully. Advance decline oscillator and McClellan oscillator are flat and may indicate the coming possibility of changes in the sentiment, yet, I would not bet on this until I see McClellan Oscillator crossing zero line and Advance/Decline Oscillator moving higher. It would be nice to see negative MVO (volume surge during the price decline) before reversal as well, yet, it's not necessary - we did not see red MVO before reversal on December 12, 2008 and December 29, 2008 and I may assume that we may see reversal without it again.

So, what is going to be next week? - I do not know - I am not an investment advisor and I do not want to be the one. Several years ago I pass the test and did have a mutual funds investment license. At that time I could be considered as an investment advisor. Yet, I left that business after I discovered that majority of investment advisors know nothing about stock market and investments and their main job is not to help people with investments but sell products of the financial institutions. After, I was put in the "shame corner" by my boss for selling to one client what he needed instead of what would give bigger commissions I decided that it's not for me. Now, I can give you only one advice - do not trust anyone in investment business, not even me. If you want to invest you will invest your own money and you have to learn by yourself what is good and what is bad.

S&P 500 Chart

Are you still hesitating that volume works? Read my "DJI Analysis" post a week ago and take a look where the indexes are no. There is one rule in volume based technical analysis that every trader suppose to know: "Do not play Short on high volume surge during the price drop". I'm not even taking about opening a long trade or analyzing volume to see where the trend reversal could be expected. This is the first rule. If you are in "short" and price goes down and you see big volume surge close the position. Yes, you may win less but you will not lose a lot on sudden and strong reversal.

I'm wondering what technical analysis with exception of volume based technical indicators pointed a week ago on the high possibility of strong reversal. News and fundamental analysis are negative all the time: refuse to bailout automakers, request for another $800 billions of "rescue package", growing unemployment, dropping consumer confidence... Try to find at least one positive factor.

The logical question could be put is "Could S&P 500 20% and DJI 18% run mean the this is the end of the Global Recession?". My answer is I do not know and technical analysis will not answer you where the Stock Market is going to be in 2-5 years. The science of technical analysis has been developed to analyze stock market trends and flow of the money (volume) in order to spot overbought and oversold condition which could could lead to the trend reversal as well as to define technical indicators that may confirm the reversal on its earliest stage. I do not believe in technical analysis for long-term trading, yet, I believe it could be used for mid- and short-term trading because these timeframes less affected by politics.

Any way, let's go back to our technical indicators to see what they forecast.


We can see some oversold levels on many indicators which is a result of strong up-move over that past week. You may see that SBV shows a lot of green, RSI and Stochastics are above 70 and 80 lines respectively, Advance/Decline Oscillator has a lot of green as well - all of these indicats overbought market at least in short term. However, even these indicators are overbought, only McClellan Oscillator is strongly Bearish - it crossed zero line. The rest of technical indicators still point to Bullish sentiment, which, however, could become Bearish any time. Yes, I see some indication of possible move down and I' would closely monitor charts over the next couple of trading session especially on intraday levels to see if the market start dropping towards the November's bottom. Even If we see that move down I would not expect to be it very deep at this point of time. I would like to see some Positive (green) MVO (high volume during the price up-move) that would indicate some greedy buying before.

If I believe that the market is still Bullish and it still may go further up, yet, there is growing possibility of having at least a correctional move down, that means that especially now I would consider some trading strategy that would protect achived profit.

DJI

Ok, as I mentioned in my last "Index Volume" post on September 16, 2008 we had it - sharp and strong recovery. Just in 1.5 trading session (from noon of September 18, 2008) the Dow Jones Industrials run up about 1000 points!!! I expected to see the indexes at September 12 levels and they (DJI, Nasdaq 100, S&P 500) are there.  I've already pointed to the meaning of the huge volume during the price slide in my "DJI Volume" with bringing to attention (in the "S&P 500" post) similar occurrences of the high volume surges in the past and the price reaction on such huge number of transaction.

I do not think there were a lot of traders who was able to open a long position over the last 1.5 trading session. I believe many traders under the media negative pressure were still trying to play short by using this recovery as a possibility to open a short position and then desperately were monitoring and thinking why the market does not go down with all these bad news... I've already mentioned my "friendly" feeling to the media "I do not trust them!!!" - They always look right by explaining the stock market after the fact. When oil goes up and the DJI drops they tell us that the investors are disappointed by high oil prices and on the next day when oil drops and you expect that investors should be happy you see another day of the DJI slide and guess what, again media is right by explaining you that investors were disappointed by bad situation in financial sector...

As I already said I'm ready to pay for a year of service that provides the volume for indexes in order to have just one such beautiful moment. With volume indicators I have fun by watching the news and their explanation of the market. Stock market is not as it was 10-20 years ago. Look at the NYSE volume 10 years ago - we have now much more speculators in the market and it cannot be ignored... 

The market is always described by price and volume and using technical analysis based on the price indicators only I consider as watching a TV with half of the screen covered. The same with volume I believe it's wrong to base the technical analysis solely on volume. There should always be at least one price based and one volume based technical indicator in any trading strategy, which one should be main and which one confirming it's another point. Only analysis of price movement together with volume flow may give the clear picture of the stock market processes.

So, we see the DJI, Nasdaq 100, S&P 500 and other indexes above the September 12th levels and the question is now "Will it run further to the August 28 and August 11, 2008 highs?"


By looking at the chart above I may say that we have great deal of the volume accumulated during the recent stock market crash, I believe that the market is still heavily oversold and it was not released from this oversold stage over 2 nights (since Thursday) it still has power to run up and so far all the technical indicators I use are positive:

• SBV is on its way up
• MVO show big oversold power
• Advance-Decline is rising
• RSI is rising to the 70
• Stochastics is above 80
• McClellan Oscillator is rising

Mainly based on the MVO I would assume that the odds are very good to see the indexes at August 11, 2008 highs.

DJI Chart

Nice week. From y last "S&P 500" post you may see that I expected some correction and we had it. Yet, the longer-term up-trend pushed the stock market higher by the end of the week. (refer to my 1-year technical analysis in my "New Highs/Lows" post on August 12, 2008 and my "DJI" post on July 20, 2008).

My outlook over the longer-term stays unchanged. The same as before I believe that the high volume surges in June-July 2008 have power to push the Nasdaq 100, S&P 500 and DJI indexes and the whole market much higher.

With shorter-term, I only may give one advice to monitor charts on the daily basis. For those who analyze charts, the Monday-Tuesday slide should not be a surprise, as well as Thursday-Friday recovery was clearly defined by the technical indicators. If today my 60-day technical analysis points to the higher odds of the further recovery (see chart below), it does not mean the the same technical indicators will be bullish the whole next week. The technical indicators on the 60-day chart can turn from bullish into bearish any time during the week. That's why I always say "do not trust my judgment, do your homework yourself and do it on regular basis. You skip it, you lose it. If you skip and did not lose that mean that you were lucky and next time you may lose even more...".

Ok, back to the 60-day chart I may say that all three indexes S&P 500, Dow(30) and Nasdaq 100 have almost similar sentiment on all technical indicators:

• SBV - Bullish - The SBV is moving up;
• MVO - Bullish - the last high volume surge is red - during the price decline;
• Advance-Decline Issues Oscillator - Bullish - The AD Oscillator is on up-side;
• RSI and Stochastics - Bullish - The RSI and Stochastics are above70 and 80 levels respectively;
• MACD- Bullish - The MACD is advancing;
• McClellan Oscillator - Bullish - The McClellan Oscillator is on its way up.

Chart 1: DJI 60-day chart with elements of technical analysis

DJI

We had very nice move up this week. In spite of negative media pressure who threatened us that another 90 financial banks more likely will follow IndyMac path, the Dow Jones Industrial index is 6.2%, the S&P 500 and the Nasdaq 100 indexes are 3.5% up from the July 15, 2008 lows. Already on July 8, 2008 in my "Stock Market Crash" post I highlighted that the market is heavily oversold and we may face the strong and fast recovery movement. However, the market moved lover and on July 14, 2008 in my "Charts Technical Analysis" post I did take a look at 1-yer charts to confirm my expectation on the market recovery. I stated that the stock market is heavily oversold and that even if the market intends to drop further down, before, it need to release the oversold pressure in the recovery movement. I pointed that the Nasdaq 100 is not as oversold as the S&P 500 and DJI indexes and we saw the Nasdaq 100 behind the other indexes rally up.

I always mention about importance of the monitoring the charts during the trading hours. By looking back on the 60-day index charts we may see that on July 14, 2008 the Advance/Decline Oscillator started to advance by pointing to the shift in the market sentiment. On the same day the SBV oscillator started to advance indicating the possibility of the recovery. Shortly after the market open on July 16, 2008 the MVO become equal to zero and McClellan Oscillator overcrossed zero line by confirming the bullish sentiment. So, I do not think that those traders who follow charts are surprised by this recovery.

Now, looking forward, we have the same question - what's next? Will the DJI and the S&P 500 indexes follow the Nasdaq 100 drop on Friday or will the recent recovery continue? I would put this question in other way - did the recent recovery release the longer-term oversold power at least partially in order to resume the down-trend? and I would put other question - looking on the recent week, did the market become oversold in the shorter term?

To answer on the first question I have to look at my 1-year chart (the chart I mentioned in my "Stock Market Crash" post).



The technical analysis applied to the yearly charts tells me that the stock market is still heavily oversold:

1. SBV is still negative and still moves up;
2.  I see only red MVO (no green MVO - no volume surges to the price up-side);
3.  Stochastics only started to move up;
4. VIX volatility index only started to decline and still is above 20;
5. MACD is not even crossed zero line on its move up from the negative area.

All the technical indicators above point to the beginning of the development of the recovery and high possibility of further up-move. The 1-year chart definitely does not show any release of oversold power and it does not show that the market has become overbought during the recent week recovery. Based on this chart I would assume that we may see further move up.

To answer the second question I have to look at my 60-day index charts and see what my technical analysis tells me about shorter time-frame. Since the Dow Jones Index has made the strongest up-move I have emphasize my attention on that index.


From the chart above we may see that the 60-day DJI technical analysis overall is positive and points to the possibility of the further up-move:

•  the SBV is still very high - could be premature to talk about changes in the bullish sentiment;
•  the Stochastics and RSI are above 80 and 70 levels respectively by pointing to the bullish sentiment as well;
• VIX volatility index is moving down, away from its July 15, 2008 high when it run above 30.
• McClellan oscillator started to move down, yet, it is still far above zero line and it could be premature to talk abbot reversal based on this technical indicator.

The only negative fact I see on the DJI chart is high volume surges during the index run up on July 17-18, 2008 (see green MVO). There is a high possibility that this high volume pushed the indexes into short-term overbought territory and the fact that MACD and McClellan oscillator started to move down shows the possibility of the market reaction on that volume. The technical studies on the S&P 500 index chart looks almost the same as on the DJI chart, yet the 60-day Nasdaq 100 chart has less positive and more negative points.

Again, I would bring up 3 possible scenarios of the further development:

Scenario #1: Stock market reacts on July 17-18 high volume and drop down - in this case it can drop lower the July 15 lows.

Scenario #2: The stock market continues to move up by ignoring the July 17-18 high volume. The market is at high oversold levels and it has power to continue the rally.  That would tell me that this high volume was generated not by buyers but sellers who considered this small recovery as a good point to sell short. In this case I would tell that, most likely, those sellers pushed the market even into stronger oversold stage and we may see even stronger recovery.

Scenario #3: The July 17-18 high volume slows down the advance and the stock market continue to move up or sideway with further retesting of the most recent lows and collecting more downside volume before final reversal.

Personally, I would stuck with the scenario #3, simply because I already see some changes in the McClellan, MACD. In addition the Nasdaq 100 is not as oversold as the other indexes. Yet, I could be wrong and may only recommend to monitor and analyze charts.

Stock Market Crash?

My yesterday's and today's post look like exception from the rule. I do not usually make any comments in my blog during the week. Yet, I do it now because of the changes we see in the stock market and I need to put my thoughts in the correct order. Writing down a few points usually helps me with it and keeps away my emotion from my technical analysis.

In my "Nasdaq 100 is Behind" post on July 1, 2008 I described two possible scenarios on my opinion of the coming reversal. Over the past week we saw developing of the second scenario where the Nasdaq 100 pushed indexes lower. I mentioned that in any cases I would watch for high volume surges that may indicate the end of the downtrend and possibility of a reversal. Yesterday, in the "Advance Decline" post I have pointed on the interesting Advance/Decline behavior and high volume surges. I do not think that today's strong and sharp recovery should be a surprise.

I believe, the main question for me now is to consider if today's strong up-move is a beginning of the recovery or it is just volatile market before further slide...

By looking at my favorite 60-day charts (which I use to analyze 2-10 days trends), after today's rally I may say that all my technical indicators are bullish and point to the higher possibility of the further development of the recovery:
- SBV started to move up;
- I see big number of volume surges during the recent decline;
- McClellan Oscillator is on the up-side;
- Stochastics and RSI bullish as well;
- Advances and Declines points to up-trend;
- VIX Volatility index dropped down.

What I like is that all the indexes (Nasdaq 100, S&P 500 and DJI) show similar bullish sentiment on all technical indicators. Basically, my technical analysis points the higher odds of up-trend.

Yet, there is two things that makes me worry and which will press me to monitor charts more closely:
1. Today's rally was on the high volume which may push the stock market down again.
2. It's a rare situation when the market make a reversal from the down-trend without at least second attempt to hit the bottom.

Basically, I see 3 scenarios of the possible further development:

Scenario #1: Stock market reacts on today's volume and continue to decline. I would be very difficult for the market to do it due to the high oversold state. It's difficult to believe that today's advance relapsed all oversold power and hifted stock market into the oversold state. Personally, I would not expect to see that scenario, yet, there is always a possibility of me being wrong.

Scenario #2: The stock market continues to move up by ignoring the today's high volume during the advance. The market is at high oversold levels and it has power to continue the rally.

Scenario #3: The today's' volume slows down the advance and the stock market continue to move up and then side way with further drop and retesting of the most recent lows and collecting more volume before final reversal.

I believe the next few trading session will more reveal the intends of the market. It would be nice to see drop in the trading volume as a confirmation of the recovery.