S&P 500 Index Chart

We had quite strong break through from the side-way trading on Thursday, November 4, 2010. The last two days of the week were accompanied by very strong bullish volume which very clearly could be seen on the Dow Jones Industrials (^DJI) and the S&P 500 (^SPX) indexes.

We had strong bullish volume surges on many indexes in period from October 12 until October 21, 2010. We have not see any reversal followed that strong bullish trading (I would not call a 2% retracement as a correction or reversal). Now, again, we have strong bullish trading...

At the current moment many technical indicators suggest good odds of further advance. This is mainly because of the advance during the last two trading sessions. However, I think that we should remember that the same technical indicators suggested a possibility of a correction just a week ago. I would not relay heavily on technical analysis right now. It looks like other factors (possibly fear of dollar inflation) move big player into the stock market, while other big players are dumping stocks.

We had strong move up and by many indicators (volume and advance/decline based) the stock market could be considered strongly overbought. The high trading volume surges over the last three weeks confirms that - there are many big traders who consider market overbought and who is dumping in big volumes to greedy  buyers. It is difficult to say who will win in this battle. Keep in mind that over the last two years there are big companies who reported big earning and who did not invested earned many in anything but was sitting on cash. Now, when the Government is officially talking about how much good an inflation could bring to the economy and FED announcement about printing and pumping another $900 billions, those companies could be buying. Of course there could be other explanation of the last two days up-move, however as technical analysts we should not worry for the cause, but watch where the money go.

Now, when the market is far up from the Augusts' lows, it would be logical to have strong correction. The question is when. Right now I would watch S&P 500 SBV Oscillator (bar period = 20) on daily chart (1 bar = 1 day). Starting from the beginning of September SBV Oscillator show positive money flow. The money flow is still positive on that chart. I would wait when I see decline in the flow. Yes, daily charts are longer-term charts and they have some lag in signals. However, if we face a correction I would expect it to be quite strong.

Chart #1: The S&P 500 index daily chart with elements of technical analysis

S&P 500 Chart

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).

Chart #1: The S&P 500 daily chart with elements of technical analysis

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.

S&P 500 Chart

Below you may see the S&P 500 index chart as a follow-up illustration to my previous "Stock Market Crash" post. Blue bars on the chart represent volume of the S&P 500 index. Increase in volume is very clearly seen at the end of April 2010, as well as huge volume on May 6-7 during the crash. The chart is taken from www.marketvolume.com

Chart #1: The S&P 500 of stock market crash in May 2010

S&P 500 Chart

Last week I have mentioned about side-way trading and waiting until upper or lower resistance lines is broken. Majority of indexes (including Nasdaq 100, S&P 500 and DJI) have run about their high levels (resistance levels) which were set in March, 2010.

The one may notice that even we had overbought signals, sometimes (as I mentioned a week ago) it is good to wait for a confirmation signals. The main indexes (nasdaq 100, DJI, S&P 500, etc) have run above their March, 2010 resistance levels and such move could be considered as a possibility of resuming up-trend. Only a few indexes remained in side-way action. Some of them are Nasdaq Biotechnology, Nasdaq Health Care, and Nasdaq Insurance (see my "Nasdaq Health Care" post). The strongest up-move has been seen in DJT (transportation) sector.

If a week ago technical indicators where mixed and some of them were pointing on possibility of down move, by the end of this week, most of them became bullish. Only some of the volume based technical indicators (see negative divergence on SBV Oscillator on the S&P 500 chart below) remain to indicate overbought levels.

Despite the fact that we may see big bullish volume accumulation, the volatility has drop to its lowest level. Last time such low volatility has been seen in the S&P 500 sector in 2007. The S&P 500 volatility (I refer to daily ATR – Average True Range) was at these levels in period from the middle of 2003 until the middle of 2007 (4 years). As a rule low volatility is an indicator of stability.

Below you may the S&P 500 chart with some technical analysis

Chart #1: The S&P 500 chart with some elements of technical analysis

S&P 500 Chart

I have already mentioned in my Thursday's "NYSE Advance/Decline" post about my thoughts of coming reversal as a reaction on extremely low Advance decline reading in all market sectors including but not limited by the S&P 500 index sector, DJI index sector, Nasdaq 100 index sector and most important by NYSE Composite sector.

When could we expect it? It is possible that Friday's drop down and strong recovery marked the bottom (support level). It could be that we still may see some volatility and slide down... Yet, I consider that we can see up move very soon. Taking into account the volume during the recent correction I would say that the market (indexes) have been strongly oversold and it is predisposed to move up to the February 2, 2010 highs and even to the January's highs.

I understand that many traders are afraid that the recent crush may grow into long-term recession. Personally I do not even consider it right now. Long-term recession and stock market crash does not start suddenly. There should be very bad economical news to trigger recession. Yes, we can see a year of side way trading as it was in 2004 and 2005. Yes, during this sideway trading the stock market can go lower. Yet, I do not think that somebody was able to generate another bubble, unless there are political factors that we not aware of and which that may affect the economy (inability of Government to stimulate economy, refuse from China to buy Treasury Bonds, etc)

Coming back to the technical analysis and by taking a look at my traditional set of technical indicators on the hourly chart I may say that may technical analysis is mostly bullish. Many of technical indicators are showing bullish signs and many of them are on the edge to become bullish:

Chart #1: The S&P 500 chart with some elements of technical analysis

S&P 500 Chart

Last week in my "Mixed Market" post on January 10, 2010, despite prior up-move in period from January 4, I was a little bit sceptical about further up-move (see four points I mentioned in that post). Now, one week later we have indexes lower after volatile week. Coming back to those four points:

1. High volume during the up-move in period from January 2 until January 8, 2010 - this point is still actual and this bullish volume still would suggest overbought market with possibility of a decline;
2. Second point was low volatility with possibility indication of coming action "squeeze before strong events" - actually we had some strong movements up and down during this week, and actually volatility started to climb up which is a bearish sign.
3. Third point was that I did not like sharp up-move at the end of trading on Friday January 8, 2010 since it did not fit overbought condition. However, already on Monday January 11, 2010 strong opening and then strong decline down changed my view. I already mentioned several times before about sharp opening and then strong decline at resistance levels as a good Bearish signal.
4. Forth point was huge volume in C stock (Citigroup) - this volume still bothers me, since I still do not see a reversal reaction on it.

Now, coming back to the technical indicators and technical analysis I may say that majority of indicators on NASDAQ 100, S&P 500 and DJI (indexes that I track) charts are bearish. However, these indexes already were bearish a few days ago on January 12, 2010 and then we had a strong recovery on January 13, 2010. Now the indexes down again and technical analysis generates bearish signals again. There is only small one difference between current bearish indications and bearish signals on January 12 - volatility now is higher. This would increase the odds of possibility of further decline.

I have posted the S&P 500 index chart with indicators I use in my technical analysis. I have not done it for a month assuming that those who follow my blog already knows what tools I use and they have access to the same charts in real time. I usually look at hourly charts (1 bar = 1 hour) and hourly charts are not the charts that help to predict a mid- and long-term trend. These charts are intraday charts and they should be monitored during the trading hours.

Chart #1: The S&P 500 chart with some elements of technical analysis

S&P 500 Chart

It is a month as the market has been trading side-way (see the S&P 500 index chart below). I have already been pointing on sideway trading in my previous posts (starting from November 15, 2009: see my "Technical Analysis" post), and it looks like the market continues to follow this pattern. Last week in my "Sideway Trading" post on December 5, 2009 I expressed my expectation to see some action on exiting from side-way trading, yet, it looks like we had another bounce from the lower line of the side-way corridor and now the indexes (S&P 500, DJI and Nasdaq 100) are headed to the upper-line of this corridor (resistance line).

At the current moment, the majority of the technical studies on my chart are bullish. However, we are coming closer to the upper corridor line and up-move become weaker and we may face another bounce down.

Now, after 1-month of sideway trading I would not bet on up-trend until I see the indexes, at least S&P 500 and DJI, are breaking strongly the resistance line (not breaking it for 15 min period and a for a few points only). At the same time I would not bet on the down-trend until I see the same indexes moving below the lower line (support line) of the sideway-corridor. The indexes have been trading in this corridor long enough to assume a possibility that overbought sentiment accumulated in the first half of November is not in force anymore and most likely it will not push the market down. Now, on my opinion, the longer-term sentiment is the only force that may push the stock market down. We may see that since July 10, 2009 the main indexes (S&P 500, Nasdaq 100 and DJI) were in the strong up-move and we may assume that they could accumulate overbought sentiment and without a new fuel (new investors coming into the market) we could face a strong correction (at least the same as we had in second half of June 2009).

Still, since we do not know what exactly may happen, we may wait for clearer and stronger signals. At least this is my view and my position on the current market.

Chart #1: The S&P 500 Chart with elements of technical analysis:

Long-Term Technical Analysis

As was promised in my previous "Simple Trading Strategy" post, I am bringing to your attention some points from my personal longer-term technical analysis.

Various techniques are used to analyze the stock market long-term trend. Some analysts focus on 5-year to 10-year charts, others focus on economic factors, etc. I would like to draw your attention to the interesting on my opinion fact that could be seen on daily charts (1 bar = 1 hour).

In the S&P 500 chart below (the Nasdaq 100 and DJI charts are very similar to the S&P 500 chart), you can see that the stock market has been in a recovery movement since the first half of March, 2009. This is when the "2008 Stock Market Crash" ended. Since then, the stock market has been in a steady upward movement, interrupted by shallow corrections from time to time. If you take a look at these corrections, you will see that the further from the bottom indexes (S&P 500, Nasdaq 100, DJI and other indexes) are, the smaller are the overbought signals that are required to push the stock market into a downward correction. You can see that this divergence between price's new highs and technical indicators (price makes new highs, but smaller, overbought indicators signal a correction) on the S&P 500 chart below on SBV, Stochastics and RSI. I think that you may find the same tendency with other technical indicators as well.

The S&P 500 Chart with elements of longer-term technical analysis

Such divergence between price and technical indicators is nothing new in technical analysis. You can see something similar more often in smaller timeframes. It usually can be seen before a stronger change in a market trend. That means that the stock market is not the same as it was six months ago when a majority of shorter-term, overbought signals were ignored, while indexes continued their rally. I am not saying that the market will crash tomorrow - not at all. The indexes and the market may continue to move up. What I want to say is that the market may become predisposed to a change in its behavior.

If this divergence between new price highs and technical indicators continues to develop in the same direction, there could be several possible scenarios: we may face a stronger downward correction than we saw and then the recovery may continue; we may go into a sideways market like we were in during 2004 after a strong recovery in 2003 that followed the 2000-2003 stock market crash; we may fall into a slow depression like there was after 1929 crash; or there could be something new.

There is still another possible development. In the same S&P 500 chart above, you can see that we had two waves of divergence between price and indicators where the second wave was smaller (less Bullish) than the first one. There is a possibility that a third wave of divergence might develop that could be smaller than the second one.

Another factor that could support the above-mentioned possibility of changes in stock market sentiment is timing. It soon will be a year since the recovery began. That means that the period of "expectation beating reports" could be over very soon. During the crash in 2008, many public companies reported losses and, by the end of 2008, everyone had lowered their expectations. Furthermore, in 2009 everyone has had "expectation beating" reports that have attracted investors and money into the market and which feed the recovery. How many companies do you think will report an "expectation beating" increase in profit in 2010 in comparison to 2009? If not many, other economic factors (unemployment, sales, GDP, borrowed money from China, etc) may begin to play roles in the market's direction.

I don't want to dig deeply into a fundamental analysis of the economy and economic factors that move the long-term market. I just want to say that I see some predisposition to changes in long-term market sentiment and market behavior. Since I am not a long-term trader, I am not going to attempt to predict where the market will be in six months. What I'm trying to define right now is where the market may continue its move. Will it move up by going into a third wave of divergence or will it begin to change its trend direction? I think it could become clear by simply monitoring higher-timeframe index charts within the next couple of weeks.

What affects me is how the market reacts to the overbought and oversold signals and how I should adjust my trading strategy in order to avoid encountering an unpleasant situation. If I see that the market starts to react differently to trading signals generated by my technical analysis (my trading system), I usually take a look at longer-term index charts to see the general market stage. Right now, I am looking a little ahead. The indexes (S&P 500, Nasdaq 100, DJI and other) still move up more easily then dropping down and we still may see new highs and further upward movement. Yet, from a prospective of my technical analysis, I see that we are in a period in which the stock market could become predisposed to changes in the long-term trend.

Technical Analysis

In my last "Trading Strategy" post on November 8, 2009 I have mentioned a possibility of the indexes (Nasdaq 100, S&P 500, DJI, etc) stacking in a sideway action at their October's high levels. The next day, on Monday November 9, 2009 we still had a strong advance and since then the rest of the week we may see that the indexes have been trading mainly sideway (see the S&P 500 chart below): the S&P 500 index exactly at its October's high levels, the Nasdaq 100 index a few points higher and the DJI index has made new 13-month high.

The S&P 500 Chart with elements of technical analysis:
Selling/Buying Volume Oscillator, Advance/Decline Oscillator, MarketVolume Oscillator,
MACD, RSI, Stochastics, McClellan Oscillator, Average True Range in Percents.

In technical analysis it is common to take a look at the history, and from the history you may see that in majority cases sideway trading at new high level ends with a correctional move down. As a rule during this sideway trading you may see strong bearish signals. If you take a look at the chart (S&P 500 chart above) you would see that on Thursday, November 12, 2009 all technical indicators (except volatility indicators) have generated strongly bearish signals. Yet, on the next trading day (Friday, November 13, 2009) the indexes bounced up from their lower level of the sideway corridor (see the same chart above).

Last week I mentioned: "At that time (in September and October) the indexes have been moving sideways for several trading days … we may see some sideway action at this level again ... If the market starts to move sideways the odds are high that the technical indicators will become bearish." That is what we saw on charts: sideway move and bearish signals on Thursday. However, in the same post I have brought some reasons why I would not consider these bearish indications as strong signals, and why I would rather consider waiting. There were two main reasons why I would avoid trading short at that moment: a) no high volume during the up-move and b) no increase in volatility.

Absence, of high volume during up-move indicates that this up-move was not strong enough to generate greedy buying when investors start to rush into the stock market with the hope to jump into "the last wagon of the running train" - as a rule such action leads to a misbalanced in the supply/demands and at least to the short-term correction down. Absence of increase in volatility indicates that the current sideway move did not generated any panic among traders which suggest there were no increase in the number of bearish traders as well. These two reasons kept me last week from trading short, and the same two reasons still keep me out of it.

Right now technical indicator on the major index charts (S&P 500, DJI and Nasdaq 100 charts) are mixed. You may see Bullish indicators as well as some indicators remain bearish:

 - SBV (Selling Buying Volume) Oscillator is moving sideways at this moment which is a neutral sign. Yet, the bullish volume (accumulated since November 4, 2009) still could be considered as a force which is strong enough to push the stock market down into a correction.

 - The absence of the Bullish volume surges (no green MVO) suggests the higher odds of further up move.

 - The advance/decline oscillator is almost flat, yet, it moves up from its most recent low which could be considered as modestly bullish signal.

 - The same as A/D Oscillator, MACD is almost flat, yet, it is moving up from its recent low which is bullish sign, on the other hand it is still in the negative area which could be considered as bearish sign. Overall, MACD could be considered bearish with tendency to become Bullish.

 - General RSI direction is down and this is bearish sign in technical analysis.

 - General Stochastics direction is up and this is a bullish sign in technical analysis.

-  McClellan Oscillator is still in the negative territory which is bullish, yet, it is very close to cross the center (zero) line which in technical analysis is considered as a "Buy" signal.

 - ATR remains on the same level and this is very nice indication (as already mentioned above) of bullish sentiment."

Overall, I would consider technical analysis mixed at this point of time. There is still an existence of a danger of a correction down. At the same time, some technical indicators push me to believe that even if we see a correction it should not be a very strong move down, unless I see at least changes in volatility sentiment (increase in volatility). At the same time indication of resuming of up-move are not strong enough to be strongly Bullish.

I am not stating that I am always right, and that my technical analysis is perfect. I am just trying to share my thoughts about current stock market sentiment and possible development of a future market trend. It helps me to put my thoughts in the order and I hope it may help somebody in avoiding a mistake that can become "financial suicidal". I would rather recommend doing your own technical analysis and checking all my statements by yourself before even considering to follow them.

S&P 500 Chart

Nice week - As I mentioned in my previous "Advance/Decline Signal" post on October 4, 2009 "there are some strong signals of a possible reversal and, personally, I would more closely watch charts over the next couple of days and I would consider that it could be too risky to be in a short position without tighter stop-loss at this time." those indicators that were bearish on February 2, 2009 became bullish on Monday February 5, 2009 and we had further recovery from the correction for the rest of the week.

Now, the main US indexes (S&P 500, Dow Jones Industrials and Nasdaq 100) are at September 17-23 high levels. Since index stuck for a week at these levels in September there is a possibility that we may see some sideway trading or a decline again. However, if we take a look at technical analysis of the same indicators we would see that only Advance/Decline Oscillator, McClellan Oscillator and MACD point to the Bearish sentiment and possibility of a decline. The rest of technical studies show shorter-term oversold stage, yet remain bullish or neutral by pointing higher odds of further up-move.

On mine opinion the most bullish signal for me is an absence of high volume during the recent up-move. We may see strong bearish volume surge on October 1-2, 2009 and this volume surge could be considered as a critical in the resent reversal. However, we have not been seen any highlighted trading activity (volume surge), which may shift supply /demand balance, during the recent up-move. Because of that I would say that there are good odds we may see indexes breaking September’s highs, yet as I mentioned before that we may see some sideway trading and even a decline before that.

Overall, I would say that my technical analysis of hourly charts (1 bar = 1 hour) does not have any leading indicators that would signal a possible downturn. However, I would not recommend rely on my words. What I would recommend is to check chart by yourself: what looks bullish today could become bearish tomorrow.

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

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.

Volatility

In my previous post on August 30, 2009 ("Swing in Trading")  I have talked a lot about swing at the market open on August 28, 2009 by encouraging everybody to take a look at history to see what usually happens after such spikes in price during a side-way trading. I think, now, those who did not have chance to take a look at history understand what message I wanted to deliver. The massage was that this is important having access to historical charts. Ability to see the past gives you a tool to compare present price movement to the past, find similar patterns and act accordingly. I think the correction down we saw at the first half of this week (after my post) is the best witness of my words.

From my communications with other traders I know that many of them ignore analyzing history. The most popular way of trading is to take the most popular technical studies, apply the most popular setting and use the most popular trading strategies to generate signals. No offence, but personally I call it "gambling". With the same success you may go to casino.

The last person I communicated called himself an "experienced trader" and he was upset that a technical indicator does not work as it is told in the book… Again, no offence, but my answer is bs. This is great that people read books, go to the universities and receive education. However, real life, real job and real trading differ a little bit from what you read in a book and study in the university. Books and university gives you general knowledge and basic tools. However in real life, on real job in real trading you have to adjust what you learned, improve it and learn how to use it on practice. If you do not do it then you always going to be upset that a technical indicator does not work as it is told in the book and blame everything around in bad trading signals.

Most technical indicators were introduced 20-30 years ago, when nobody had access to intraday data and intraday charts. Most of the mentioned in the books setting for technical studies are for daily data and long-term trading. It is not a good idea to use the same indicators setting in intraday trading. It simply does not always work. When you look at 10-year chart you may ignore the market volatility because in 10-year frame you see market decline, market crash, recovery, up-trend, etc. Basically, you see different markets with different volatility in one time-frame. When you dig into intraday charts you cannot ignore volatility. On intraday levels, price trend acts differently in down-trend (high volatility), during the crashes (extremely high volatility), recoveries (middle volatility) and up-trends (low volatility). Respectfully, on intraday level a technical indicator setting should be adjusted in accordance to the market condition.

The simplest way of adjusting a technical indicator to the current market is

1. Find in the history periods with similar to the current market volatility and similar longer-term trend.

2. Find out what indicator setting would work best for you in those periods in history.

3. Try to apply the same indicator setting in current market.

In my understanding, the history is the strongest weapon in the arsenal of a trader and the most important component in technical analysis.

I think, I went out of my weekly posts topic. Coming back to it - see below the S&P 500 chart with the sentiment on technical studies I track. By the end of the week all technical indicators are bullish. The Nasdaq 100 and DJI technical analysis results look the same which is a good sign. There is still a room to the upper sensitive level.

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

S&P 500 Analysis

It is 3 weeks as I posted a chart in my "S&P 500 Rally Up" post where I pointed to the overbought condition of the market and expressed a possibility of sideway move that may turn into a correction. Since then the Nasdaq 100 and many other indexes have been moving in sideway corridor. The S&P 500 and Dow Jones Industrial (^DJI) indexes pushed by Financial and Housing sector (see my previous week "Financial Sector" post) started their sideway move a week later on August 3, 2009.

Now, when it looks like financial sector is not pushing S&P 500 and DJI indexes up and is not holding the rest of the market in sideway corridor we may ask: "could be expect a correction down?"

There are always two answers in stock market technical analysis: a) market can go up, and b) market can go down. So I decided to summarize a few points that favor those answers  from my prospective.

In favor of up move:

1. In some cases when the market is in sideway corridor for a prolonged period of time it can release itself from the overbought condition it was when it entered the sideway corridor. Furthermore, I would say that the Nasdaq 100 and some other indexes are not as overbought as they were on July 23, 2009. We saw some negative money flow on those indexes and they do not need a strong correction down to resume a recovery.

2. The stock market is far from its crash bottom and we will continue to have good and positive economic reports as we had over the last month. At the end of 2009 the public companies and economists “purposely” have set their expectation levels too low (they expected further crash and weak market). As a result, now, and I think for the prolonged time we will have good economic reports that will "exceed expectations" and these good news may push market, indexes and stocks up.

In favor of down move:

1. I think the stock market is still overbought after its last rally up.

2. The volume surge on August 5-7 in the S&P 500 Financial sector is very big and could mark end of the rally in this sector. The Nasdaq Other Financial index that represents smaller financial companies is already almost 5% down from its top on August 7, 2009.

3. If the “Health Care Reform” gets green light we may see investors pulling money out from the health insurance companies.

There could be other points, yet, coming down to the technical analysis on chart I may say that the sentiment is more Bearish. Majority of technical indicators on S&P 500, DJI and Nasdaq 100 indexes suggest negative trend (see S&P 500 chart below). Still, on the same chart you may see Bullish Stochastics and RSI. I would say, if the indexes break their lower corridor level that would confirm a correction and at this point of time more odds on this side. Yet, if the indexes run above their upper corridor border we may not see a correction at all.

S&P 500 chart with Technical Analysis of SBV, MVO,
Advance/Decline Oscillator, MACD, RSI, Stochastics and McClellan Oscillator

S&P 500 Technical Analysis

With exception of Monday, the past week could be considered positive. Yet, by the end of the week the indicators make me somewhat cautious about the further trend. The correction we had from June 12, 2009 until June 23, 2009 could be considered as the strongest down turn since March 9, 2009 (since the market is in the longer-term up-trend). The high levels the indexes hit in the beginning of June became a strong resistance barrier. The Dow Jones Industrials (^DJI) has been fluctuating around the same resistance level for a month (from December 1, 2008 until June 9, 2009). The S&P stuck close to its current resistance in December 2008 as well. Yes, the Nasdaq 100 index is one of the indexes that recovered stronger, but we should remember that the Nasdaq 100 represent non financial companies and was less affected by 2008 stock market crash.

So, we may see that June’s high levels are quite sensitive and even if indexes continue to move higher by recovering from the recent correction I would consider that the odds are pretty good that we may see them stuck at the marked resistance level again. I would say that we may even see second bounce from there (this is just my opinion based on my personal technical analysis).

Despite the recent up-move (from June 23, 2009), at the current moment my longer-term technical analysis is not very optimistic. For a longer term sentiment I usually refer to the daily charts: from 1-year (1 bar = 1 day) to 3-year (1 bar = 3 days). I do not give snapshots of these charts in this post, however, I will try to post them in one of my next posts. All these charts are Bearish at this moment: I see negative money flow, I may consider that the market become somewhat overbought after the strong 3-month recovery rally (March-May 2009), average daily trading volume is down which means that the first wave of Bullish investors who push market up become exhausted, etc. Overall, my longer-term technical analysis is Bearish. However, on the other hand, we should not disregard the fact that during the recent correction down the main indexes (S&P 500, DJI, Nasdaq 100, Russell 2000…) were released from their overbought conditions at least partially which could keep the market and indexes at the current high levels.

In a shorter term – see S&P 500 index hourly chart below – we may see some sentiment changes towards bearish mood: SBV moves down, high green MVO (volume surges during the price up-move), declining Advance/Decline Oscillator, declining MACD and declining RSI. Stochastics is still could be considered positive and McClellan Oscillator is still above zero line which is a positive sign as well. In summary, I would say that my shorter-term technical analysis results point to the possibility of slide. Again (as I mentioned before) this is intraday chart and should be monitored during the trading hours for possible changes in the sentiment and trend.

Chart: S&P 500 index 60-day view (1 bar = 1 hour)

S&P 500 Shorter-Term Chart

Those who follow my blog should remember the "S&P 500 Chart" post on May 24, 2009 where I draw the resistance line break of which would signal the end of the flat market we saw in May 2009. It looks like, now, we are back in the bullish market - at least technical analysis of daily charts (1 bar = 1 day) is positive again after being negative for the biggest part of May. Still, I would encourage everybody to take a look at higher timeframe charts by themselves to see what market stage we are in. Even if you do not trade indexes, even if you do not-trade in mid- and long-term, in some cases it could be useful to have some picture about situation on the stock market. It may help you to august your personal trading strategy to the current sentiment.

Taking a look at shorter-timeframe chart (hourly chart: 1 bar = 1 hour) we may see mixed sentiment, yet, with bullish dominance (see S&P 500 chart below). When I mention hourly charts I assume 3-day and smaller trends. Majority of technical indicators on this chart have bar period setting less than 20 and multiplying it by 1 hour (bar time frame) you will have maximum 20 hour coverage which is about 3 trading sessions (one trading session is six and half hours long). However, the market is still volatile (see ATR, VIX and other volatility indicators) and I would not bet on this chart for longer than a day ahead. Furthermore, this chart should be monitored during the trading hours.



Overall, as I have already mentioned above, my technical analysis applied to hourly charts show dominance of bullish sentiment (see direction of arrows for each technical indicator). There are still two negative signs: declining SBV and declining Advance/Decline oscillator, however, SBV is almost flat and previous Adv/Decl red area is much bigger than the recent green one.

S&P 500

It has been for a while since I post a chart in my blog. I usually do not do any technical analysis posts during the week (as a rule I do it on week-ends), yet, I'm just have time to put a few notes. By referring back to my previous week "Industrial and Financial Sectors" post where I mentioned about a possibility of shifting in supply/demand balance which may lead to the dominance of bearish sentiment on the market and as a result to the correctional move down, I may say that this week we saw this move. The strongest drop has been noted in the Nasdaq 100 sector. Actually this was the strongest Nasdaq 100 index drop since March 9, 2009 (reversal day - see my "DJI Chart" post on March 1, 2009 where I predicted that reversal). I cannot say it about DJI and S&P 500 indexes, on the other hand these indexes did not run up as high as Nasdaq 100.

Today we had a positive session - some recovery after the down turn. There is always a traditional question: What is next? Will market go up? or will it drop further down? From the S&P 500 chart below you may see that majority of the technical studies I use in my technical analysis are bullish and point to the good odds of the further recovery. The last Bearish volume surge in the S&P 500 and Nasdaq 100 sectors confirms it. However there is a few factors that make me hesitate about expectation of a strong recovery. There are a some of them:

1. I have not seen Bearish volume surge (volume surge during the price move down) in the Dow Jones Industrial index;

2. Since March 9, 2009 the market has been moved strongly up and we have not seen any strong correction;

3. The first correction during the 2 month recovery was at the end of March 2009. This correction was not a strong one nor a prolonged one. As a rule second correction should be stronger because it is further from the March 9 bottom and market become more overbought as it was in March;

Because of that, at this point of time, even if I see further recovery I would not expect the market (indexes) to go higher than May 8, 2009 highs. At the same time I would more closely watch the intraday charts since there are good odds we may see market reversed down again. The good news is that is that volatility goes down: VIX (volatility index) moving lower, ATR (Average True Range) is moving down as well (I monitor them on daily chart). That tells that it is very unlikely to have crash down. Stock market becomes more quiet and if we see correctional move down it should not be a dramatic movement.

S&P 500 Chart

Did not post any charts lately. In my previous "Simple Technical Analysis" post on April 12, 2009 and "S&P 500 Volatility" post on April 5, 2009 I have mentioned about possibility of the indexes stacking at the levels where the market spend a lot of time in side move. I called those levels sensitive levels. Below I have set 2 charts of the S&P 500 index: 60-day (1 bar = 1 hour) and 1 year (1 bar = 1 day) to show what I wanted to tell.

From the 60-day chart (see first chart at the top) you may see that almost whole April the indexes basically were in the side move. The Dow (^DJI) index was the first index that started to move side-way, then a week later S&P 500index followed this pattern and the Nasdaq 100 index, as always, still could be considered in the up move. From the second 1-year chart (chart at the bottom) you may see that theS&P 500 index stopped its recovery at the same levels where it was in a side move in period from the middle of January to the middle of February 2009. The DJI index stuck somewhat lower and the Nasdaq 100 run over those levels.

Those traders who are more than a year on the market has to know that in the majority situation the indexes are flat in the resistance and the support as a rule is sharp. It could be easily explained by simple fact that greedy buying usually spread over the time while panic selling is always sudden and sharp. Because of that I believe many of technical analysts are asking: "we were in strong recovery… now we are flat… What is the next? Reverse down?"

The answer on this question, I think, lies in the technical analysis of the longer-term trend. If according to the longer-term analysis we are not any more in the recession I would assume that the odds are still on the side of the recovery and we may see some decline after this side-way move and then resumption of the recovery. We already had similar situation from the middle of June 2003 until the end of August 2003, when after strong recovery stock market has been flat for 2 months and then it went back into up-trend for the next 7 months. As I repeatedly mentioned, the stock market cannot move up all the time. During the recovery (or up-trend), time on time, stock market has to release itself from shorter-term overbought conditions. This is exactly what we have right now on my opinion.

S&P 500 Volatility

Isn't it nice to watch rising market. Last week on March 29, 2009 in my "S&P 500 Chart" post I have mentioned about increased possibility of the a correction down and we had it. Now, the stock market is up again. We see over the last month what I would call "one step down, two-three up" - we have shallow correction down and then strong continuation of recovery. Again, I repeat what I stated on March 22 in my "Short Technical Analysis" post:

...March 6, 2009 bottom was the last drop in the recession and now we are in the long-term recovery. In this case this bullish volume could be ignored and could indicate long term change in the stock market sentiment as it was in period from March 12 to March 21 of 2003...

That is exactly what wee see: big bullish volume surges during the index up-move are required to push indexes into a small correction, while even small bearish volume surge reverses the indexes back into the up-trend. It's not just about volume indicators. If you take a look at other technical analysis indicators you may notice similar picture: only after strong oversold signal the indexes go down and weak overbought signal push indexes back into recovery mode.

That is exactly what we see when to we do shorter term technical analysis: big bullish volume surges during the index up-move are required to push indexes into a small correction, while even small bearish volume surge reverses the indexes back into the up-trend. It's not just about volume indicators. If you take a look at other technical analysis indicators on shorter-term charts you may notice similar picture: only after strong oversold signal the indexes go down and weak overbought signal push indexes back into recovery mode.

To better understand this shorter term phenomenon we have to take a look at higher timeframe charts. Yes, 60-day chart is good and I use it in many cases to define the general market sentiment, yet, time on time look at higher timeframe is recommended.

From the 2-year S&P 500 chart (1 bar = 2 days) below you may see, that even we had high volume over the past month, from the long-term prospective it is still volume at the bottom – it is still bearish volume and the market is still strongly oversold on this chart.



The stock market sentiment (sentiment of the Nasdaq 100, S&P 500 and DJI indexes) is positive on this chart. The next sensitive level for S&P 500 is $900 and for DJI is $9,000. We saw a lot of volatile trading around both these levels in period from October 2008 until January 2009.

On the same S&P 500 chart above I have plotted ATR (Average True Range) indicator to display the market volatility over the past year. I mentioned several times that volatility technical analysis is recommended for every trader. The purpose of this analysis is to recognize different stock market stages and adjust technical indicators and trading systems to the current market condition. By following the market volatility I would say:

• Before June 2007 the ATR was in the range of 10-15 points – we were in uptrend.
• In June 2007 the S&P 500 volatility doubled – first sign of recession.
• The Volatility stayed on the June’s level (in the 20-30 points range) until August 2008 – From June 2007 until August 2008 we were in recession.
• After August 2008 we had sharp increase in volatility (up to five times) with peak on October 22, 2008 – it was stock market crash (it was not any more a recession, it was crash).
• We had extremely high volatile market in period from August 2008 until November 2008 – stock market crash.
• Since then the S&P 500 volatility dropped down and basically stays on the June 2007 - August 2008 levels. I would call period from December 2008 until February 2009 as "after crash distribution" or as "levelling" when those stocks that still have to go down went further down (DJI stocks) and those stocks that were healthy and already undervalued remained flat (Nasdaq 100).

S&P 500 Chart

For several weeks I have not been referring to any chart in my posts. I assumed that, whoever reads my blog may know from my previous posts charts setting I usually discuss and may simply open these charts. Now, I think, it is time for me to make chart snapshoot again. At the end, I believe it is easier to follow my posts and points of my technical analysis by looking at the chart (majority of people, including me, visually accept faster) than just simply reading the words.

Below you may see the S&P 500 60-day chart (1-bar = 1 hour). Some of traders call it 60-day chart because you may see 2 months of data on screen, some of traders cal it hourly charts because one bar covers one hour. I give both references for earthier understanding.


On the S&P 500 chart (Nasdaq 100 and DJI chart similar at this time) above you may see the standard set of my technical indicators for hourly charts. As you may see I do not rely on one indicator and even I consider volume as one of he most powerful tools I do not rely solely on it. Basically I have three groups of indicators on this chart: volume based, price based and advance/decline indicators. In this way I believe I cover all aspects of the trend analysis.

At this point of time my technical analysis of the hourly charts tells me that the market could be considered overbought in the short-term and we may expect to see some correctional movement down. By shortly summarizing the indicators above I may say that:

• High green MVO, RSI above 70, Stochastics above 80 - all of these suggest the indexes are overbought in short term (short-term because it is not high time-frame chart).
• Declining SBV, MACD and McClellan Oscillator point that the sentiment started shift toward the Bullish mood.
• RSI and Stochastics are still above 70 and 80 respectfully by still pointing to the Bullish sentiment.

From these three points above I may assume that we may expect to see a short-term correction down because the indexes could be considered overbought and we already started to see some changes in the sentiment from Bullish toward Bearish. However, I would like to see some flat market before. It is unusual to see sharp reverse down after strong up move. As a rule market (indexes) can have sharp reversal in support, yet, in resistance it is common to see several sessions of flat market. At the same time the SBV is still high and McClellan Oscillator with MACD did not crossed zero lines - these as well tells me that we may see some flat price movement before correction.

From the short-term analysis prospective I would recommend always consult higher timeframes (it is always a good trading strategy to analyze several timeframes). If you apply the same technical analysis to daily charts (1-year chart where 1bar = 1 day and 3-year chart where 1 bar = 3 days) you may see that in the longer term the market is still strongly oversold and longer-term sentiment is strongly Bullish. Because of that even I expect to see correction down I would not expect it to be very strong but rather a short-term move down within longer-term recovery. I even assume that because of the strongly oversold longer-term market (indexes) the shorter-term overbought levels could be ignored and there is a possibility of further up-move.

Overall (do not confuse you) I would say that my technical analysis suggest recovery in the longer-term, yet possibility a correction in the shorter-term.

S&P 500 Technical Analysis

It's good to be right. Those who read my last week "Low Trading Volume" post saw my Bullish sentiment which is gracefully paid off now.

The indexes has broke the corridor described in my "Index Analysis" post on December 21, 2008 and they broke it by moving higher. This is one more evidence that the extremely huge volume surges in the middle of November 2008 have set very strong support level. Since November 21, 2008 the S&P 500 index has made 25% up, Nasdaq 100 indexes has recovered 24% and Dow Jones Industrial is 21%.

At the current moment my technical analysis has the same as a week ago results. Even if majority indicators show shorter-term oversold indexes, they are still Bullish. The real attention on my opinion should be paid to the high MVO from December 30, 2008 until January 2, 2009. This high volume may push indexes down, however I would not expect to see it until I see a few sessions of flat market. Furthermore, I would say that my technical analysis is Bullish and I would expect to see some more up and flat market. However, taking into consideration high MVO It could be smart choice to tighter trailing stop.


Again, I repeat what I already stated hundreds times. This is my technical analysis and as any human I could be wrong. I can only give one advice - find nice chart and sharpen your skills.