Another Crash

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.

Short Technical Analysis

Overall, the past week was positive on the market (see my "Volume and Money Flow" post on May 23rd, 2010). The only negative thing was the strong negative opening on Monday, May 24 of 2010. The first fifteen minutes of trading on that day were extremely bearish. Basically, because of these 15 minutes of bearish trading, the indexes (Nasdaq 100, S&P 500, DJI and other are only modestly higher than the previous week close on May 21, 2010.

This week I'm not as bullish as I was last week. Yes, taking a look at the longer term chart, the odds are good that we may see a recovery to the higher levels. However, on shorter-term charts we may see some bearish signs

What exactly makes me worry is that the volatility remains at high level and that many technical indicators (Money Flow indicators, Breadth Indicators, Stochastics, RSI, etc) on the hourly chart have turned into bearish.

Another thing that makes me worry is that during intraday trading at the end of the session on May 26, 2010 we had strong bearish volume surge. For short-term frame this volume was quite strong, however we did not see strong up-side reaction on that bearish volume. Only one day (on May 27, 2010) we had bullish trading. 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.