S&P 500 Technical Analysis

A week ago in my "Technical Analysis" post on Sunday September 13, 2009 I have pointed to a bearish sentiment and overbought signals on majority of technical studies. However, in the same post I mentioned: "As a rule, when market comes to some overbought level it is stuck at this level for a couple of trading sessions and moves side-way before a decline." As you may see the history analysis helps in making a correct decision not rushing into a short trade even in situation when technical analysis is in favor of a correction. In one trading session, on Thursday September 15, 2009 the stock was back in the up-trend. On that day (September 15), all technical indicators on the Nasdaq 100, S&P 500 and DJI turned from bearish into bullish.

Now, by the end of this week we have a similar picture. Again, many of technical studies on the Nasdaq 100, S&P 500 and DJI charts point to overbought (short-term) levels and bearish sentiment. And again, I would recommend taking look through the history of these indexes. You should see that in the resistance (before a correction) we have a few sessions of sideway trading. In opposite an exit from a support is sharp and strong. This is not a 100% rule, yet, I would say that the odds of having a sideways trading in resistance are quite high.

The last two weeks’ rally up (from September 3, 2009) has push the stock market and indexes into overbought condition ( for a short term at least). A correction down would be healthy for the market. However, a possibility of sideway trading still exists and personally I would watch the Nasdaq 100, S&P 500 and DJI indexes for stronger bearish signals.

Right now the technical analysis applied to hourly charts shows following:

1. High volume surge on September 15-16, 2009 during the price advance (see big green MVO) suggests a possibility of reversal down.
2.  The RSI (Relative Strength Index) and Stochastics have dropped below 70 and 80 lines respectfully and both these indicators are in decline which is a bearish sign.
3.  The Advance/Decline Oscillator declines and is close to the center (zero) line. This could be considered as a bearish signal as well.
4. The MACD moves up, yet, this move is almost flat. Even this indicator is bullish, it’s not a strong signal and it could turn into bearish signal very easily.
5. The SBV Oscillator declines slowly which indicates bearishness, yet, it is still has high positive readings. It would be nice to see it dropping closer to zero line before considering it as a strong bearish signal.
6.  McClellan Oscillator is neutral on the Nasdaq 100 and S&P 500 indexes - it moves flat at a zero line. However, McClellan Oscillator applied to the DJI index is positive (above zero line and in flat move).
   

The S&P 500 Chart with elements of technical analysis.

S&P 500 Chart

A few numbers:

• DOW is more than 4,500 points down from its October 2007 high and only 2,100 points above March 2003 low;
• S&P 500 is more than 500 points down from its October 2007 high and less than 300 points above March 2003 low;
• Nasdaq 100 is mote than 800 points down from its October 2007 high and about 500 points above February-March 2003 low;

Pretty scary... Yet, I'm optimistic. It's going to be up and taking look at volume surges I saw during this crash I would expect to see a recovery to the August 2008 levels at least. The question is when it will go up. The answer is "sooner or later, but not during this week to that levels for sure" (smile). But seriously, I do not expect the indexes to recover to that levels even by the end of this month, on the other hand anything could happened and that is why it is good monitor the market on daily basis. I believe many traders my find this time good for long-term pension investments by using 401k to buy some stocks on monthly basis (using dollar cost averaging).

For short term speculative investments I may suggest only one - protect your profit. As soon as your position is in profit it is good to have trailing stop set. If you are today in winning position, in such volatile market without this profit protection you can be in losing position tomorrow very fast...

So, what my technical analysis tells me.


This week I decided to use the same chart explanation table I used in my "Nasdaq 100" post on September 6, 2008

	Nasdaq 100	S&P 500	DJI
SBV	Bullish - Moving up
MVO	A lot of red MVO and absence of green MVO suggest highly oversold market
	Bearish - MVO still negative. only when it becomes zero we may say that the volume went down and panic selling is behind		Bullish - MVO=0 and the last MVO was negative
AD Osc.	Bearish - Moving Down
MACD	Bullish - Moving up
RSI	Bullish - Just moved above 30
Stochastics	Bullish - Just crossed 20
McClellan	Bearish - Negative, moving sideway or down
VIX	VIX (Volatility index) is above 50 indicates extremely oversold levels. Yet, it does not move down and could indicate bearish sentiment

Keep in mind that technical analysis based on the 60-day chart cannot be used for mid- or long-term trend. The usual trend that could be expected from the 60-day chart analysis would not last longer than 5-10 days in the normal market. In the high volatile market we have I would not bet beyond 1-2 days from now. Again in such volatile period it is very important to monitor charts constantly - the sentiment changes are very fast and rapid.

Nasdaq 100

In my last "Nasdaq 100 Chart" post I have mentioned about the desire of the Nasdaq 100 index to compensate in recent decline what it missed in June-July 2008 decline. I've already emphasized in July (see "DJI" post from 07/20/2008) that the Nasdaq sector was not as oversold as S&P 500 and DJI indexes at that time. It looks like now the Nasdaq stocks decided to catch in the recent decline what was misses in July. While the S&P 500 and DJI indexes were ready for the recovery the Nasdaq 100 index was still behind. However, now (over the last week) we see strong volume surges in the Nasdaq sector. The volume during the decline indicates panic selling and high volume surges during decline indicate that some traders decided to satisfy the demands of the panic sellers by buying huge amount of shares. Keep in mind that Nasdaq 100 index has been in decline since August 16, 2008 while the S&P 500 and DJI only since September 2, 2008 (only 4 trading session).

Now After this week I see very good chances for a recovery. By looking at the 1-year index charts I may assume that the Nasdaq 100 index has become oversold as well and now all three indexes have power to move up. Yet, I could be wrong and I do not recommend following conclusions of my technical analysis. Each trader has to do his/her own homework...

Coming back to my favorite 60-day chart, I see good odds of bullish market, at least at the beginning of the coming week (for the rest of the week I would analyze the same chart during the next week).

I have selected the Nasdaq 100 chart again since (on my opinion) this index was the major engine behind the recent decline. The S&P 500 and DJI indexes technical indicators look similar. This week I decided to set a table of these three indexes which summarizes used by me technical indicators and results of my technical analysis:

	Nasdaq 100	S&P 500	DJI
SBV	Bullish - Moving up
MVO	Bullish -Big volume surges. Now, MV=0 and this is a positive sign as well	Bullish - Big volume yet not as big as in the Nasdaq 100 sector
AD Osc.	Somewhat Bullish - Moving up, yet still at low negative levels
MACD	Somewhat Bullish - Moving up, yet still at low negative levels
RSI	Bearish - Still below 30	Bullish - Just moved above 30
Stochastics	Bullish - Crossed 20 and moving up
McClellan	Somewhat Bullish - Negative and far from center line

Technical Analysis - New Highs and New Lows

As I mentioned several times I believe that it is important to understand the nature of the technical studies in order to properly use them in technical analysis. Use of indicators without understanding the principles that move them may lead into situations when a trader starts to blame an indicator for fake signals.

New Highs & Lows indicators are from the group of Breadth indicators and they represent the number of all stocks reaching the new 52-week highs or lows. These indicators are applied to the indexes and exchanges only (to the basket of stocks) - they cannot be applied to an individual stock.

Initially the New High/Lows indicators were applied to the New York Stock Exchange (NYSE). Now many traders started to apply it to the S&P 500 index which is well known as one of the best indexes reflecting stock market sentiment.

So what does New Highs and New Lows show?

I would set 4 basic principles behind these indicators which summarize my understanding of the New Highs and New Lows based technical studies:

1. When we see that the number of new highs increases and the number of new lows decreases during the price advance we have to understand that the bullish sentiment is dominant on the market. Basically we see that the number of stocks making new highs (moving up) increases and it attract investors to play up. Every day we see more and more stocks involved into uptrend and there is a possibility that the index will continue to move up.
2.  When we see that the number of new highs declines and the number of new lows raises during the price drop we have to understand that the bearish sentiment is dominant on the market. Basically we see that the number of stocks making new lows (moving down) increases and it attract investors to play down and possibility of further crash is still high.
3.  When we see that the number of new highs started to decline and number of new lows started to raise while the index price is still moves up we may tell that some stock from the index basket started to drop after being overbought and this change in the sentiment may involve other stocks into declining movement which may lead the index into the recession.
4.  When we see that the number of new lows started to decline and number of new highs started to raise while the index price is still moves down we may tell that some stock from the index basket started to advance after being oversold and this change in the sentiment may involve other stocks into a recovery process which may lead the index and majority of stocks from this index into the new up-trend.

here are 2 popular technical indicators based on the New- Highs and New Lows numbers - New Highs/Lows Oscillator and New Highs/Lows Ratio:

New High/Lows Oscillator = New Highs - New Lows

New High/Lows Ratio = (New Highs - New Lows) / (New Highs + New Lows) * 100

By applying the principles discussed above to the oscillator and ration we may say that:

1. When then the New Highs/Lows Ratio or Oscillators moves along with a price moving average (price trend) it confirms the current trend.
2.  When we start to see the divergence between the New Highs/Lows Ratio or Oscillators and price moving average it could signal about coming trend reversal.

Comparison of the New Highs/Lows to the behavior of the price moving average helps to look beneath the surface and can often warn about coming trend reversals. Yet, investors should be very careful with applying New Highs and New Lows based technical indicators to the basket with the small number of stocks. Such indexes as Dow Jones Industrials (DJI - basket of 30 stocks), Dow Jones Utilities (DJU - basket of 15 stocks) and Dow Jones Transportation (DJT - basket of 20 stocks) may lead to confusion since in majority of the cases we may see only making New Highs (New Lows = 0) or only making New Lows (New Highs = 0) stocks. To simplify the analysis and help with analysis of the small basket indexes, the moving average could be applied to the New Highs/Lows based technical studies.

Another point is that an investor (trader) should understand that New Highs/Lows indicators are based on the daily data and it could be difficult to use them on the intraday level. It would be logical to use them on charts where 1 bar equal at least to 1 day - lower timeframes become less informative.