S&P 500 Financial

Last week in the "Volatile Markets" report (on August 15, 2010) I stated: "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.... 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.". The stock market continued to be volatile: we had strong bounce up on August 17, 2010 and then continuation of decline on August 18-20, 2010. By weekly results the indexes (S&P 500 and DJI) moved lower. The exception was the Nasdaq 100 index which stayed above its August 16's Low.

The Nasdaq 100 index was less bearish than other indexes, which could be explained by high bearish volume surges during the decline on August 10-12, 2010. The S&P 500 and DJI indexes did not have such strong bearish trading activity in that period, therefore they were more bearish.

At this moment the majority of technical indicators remain to be bearish by suggesting the higher odds of further decline. However, I would like to drag your attention to the S&P 500 Financial index. If you take a look at this index you will see extremely strong bearish volume over the past two week. We have not seen such strong bearish trading in the financial sector since October 2009. This volume explains that there are many traders in panic of double dip reception (widely advertised all over the news), with fresh memory of crash in the financial sector, who are trying to pull funds out the financial stocks while other (I believe institutional traders) are buying from them in huge volumes (because those stocks most likely still under-priced).

Because of this strong bearish volume in the S&P 500 financial index I may assume that we could be closed to the bottom of the recent correction. Yet, it would be nice to see strong oversold signals first in the S&P 500 and DJI indexes - so far we have not seen strong bearish volume on these indexes on daily charts,

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

Financial Sector

I my previous "Technical Analysis" post I have talked about a possibility of correction and we had a small one which does not feet very well into the picture. It's difficult to believe that 2-day small move down on August 5-6, 2008 is the only correction we are going to see after the strong up-move we had in July.

The technical analysis by the end of the week is positive, however, I would not bet on the strong up move. I would rather prefer to see flat market that may turn into stronger than we saw correction down. Still, technical indicators on all 3 main indexes I track (S&P 500 DJI and Nasdaq 100) are positive at this moment and favor further up move.

Mine main concern is the financial sector. If you take a look at S&P Financials, Nasdaq Financial 100 and compare them to the technology and other indexes you will see that for many indexes up-move ended on July 23-27. Many of the indexes are in the sideway corridor since then.Dow Jones Utilities, Biotechnology index and Health Care Index could even be considered in the down-trend since July 27-30, 2009. So, we may say that technology, utilities and other market sectors became overbought and were ready for the correction down in the end of July. Yet, the financial sector continued its rally up and helped to hold the rest of the stock market from the correction. I consider that this is the main reason we did not see a strong correction.

Now, I would like to ask: "What will happen when the rally in financial sector becomes exhausted and financial sector become overbought at least in a short-term?" To answer on this question I would have to find out if the rest of the market is still overbought or the other market sectors become less overbought or even oversold over the last two weeks. If you say that the other sector indexes become oversold or less overbought during 2-week sideway move and shallow decline, than I would say that we may see up move wile financial companies have a correction or sideway trend. If you say that non-financial indexes are still overbought (at least in the short-term) then I would say we may see nice move down.

Personally, I did not see a strong correction on any of indexes (market sectors) and I did not see any volume surges during the price decline over the last two weeks. That is why it is difficult for me to assume that the market is ready for further up move.

Mine main point, beside of mine personal opinion on the market trend, was to show that in some cases it could be useful to take a look at wider range of the indexes. Especially it could be useful when you are in situation when you see Bearish signals, but instead you have sideway market or even modest advance. So, do not be narrow and do not focus on what you trade only. In some cases, when the stock you trade does not move along with yourtechnical analysis it could be not because your analysis is bad, but, because your stock is under an influence of other factors that you do not see yet.

Industrial and Financial Sectors

Just a short post. Today's daily volume on the S&P 500 index is the biggest volume over the last 2 months. Taking into account that this volume surge has been noted during the price advance I would assume that we may possibly see the shift in the supply/demand balance. Similar situation could be seen on the Dow Jones Industrial index. The Nasdaq 100 index does not have such high volume surge, however, this index has been moving flat for the last three trading sessions. Comparing different market sectors I may say that the highest trading activity could be read in the industrial sector ( DJI, Nasdaq Industrials, Nasdaq Capital Markets). I can see high volume in the financial sectors as well - Nasdaq Banking and Nasdaq 100 Financial - yet not as big as in the industrial. Other stock market sectors (DJI,DJU, Nasdaq Internet, Nasdaq Computer) have relatively smaller volume surges or do not have increase volume activity at all.

I do not know why we can see increased trading in the industrials and financial sectors. It could be because the investors are waiting to see Chrysler bankruptcy and how it will affect automotive market, or those investors who bought in February decided to pocket a profit or it could be something else. I know one thing - such big volume means that big number of investors (or small number of investors with big money) started to relocate their investments and that may lead to the change in the supply/demand balance and as a result to a change in the stock market sentiment.

I would personally watched very closely stock market over the next couple of sessions to see how the market will react on this volume. I am not telling that the market will drop tomorrow, it could continue to move up, however I would prefer to stay in cash for now. Maybe I'm wrong and maybe I'm loosing opportunity to make some profit, yet, I consider there are moments when it could be useful to stop and monitor for a while in order to see the development of events - in current situation development of reaction on this high volume.