High Advace/Decline Readings

As emini index futures suggested yesterday, the indexes are up. The US Dollar is down which could be the cause.

The indexes are up too strong. The current up-move is not very healthy by two reasons: it will bring the volatility up and advances and declines are hitting extremely high levels (known as overbought levels in technical analysis).

From
http://www.marketvolume.com/quotes/advance_decline_sentiment.asp
you may see:

For the S&P 500 advances beats declines by margin of 480 to 13. On the Nasdaq 100 advances beat declines by margin of 95 to 5.
Advance/Decline issues ratio on the S&P 500 hit 19 and advance/decline volume ration hit 40. See advance/decline sentiment at
http://www.marketvolume.com/quotes/advance_decline_sentiment.asp?s=SPX

I would not trade up - we may go down in the same way we are going up at such conditions.

Advances and Declines

Past week's decline has been supported by high bearish volume in the Nasdaq 100 sector. As a result today's session was under the Nasdaq 100 attempt to push the market higher while other indexes remained flat. US Dollar index was down today and it was another factor that hold the market form further decline.

We had strong decline yesterday during which advance/decline volume and advance/decline issues on the S&P 500 and NYSE composite indexes has hit very low readings. As a rule such readings in technical analysis are considered with oversold condition and panic selling and are usual noted at the bottom of a correction. However, current decline did not generated any noticeable bearish volume surges on the S&P 500, NYSE Composite and Russell 2000 indexes. Yes, we saw high volume on the Nasdaq 100, however, the Nasdaq 100 index is not volume leading stock market index. Because of these low advance/decline readings we may see some bounce up, yet, I'm skeptical that it could be end of correction.

From the money flow prospective, we may see positive money flow on 1-min time-frame, however, 5-min, 15-min, 30-min and hourly time-frames have negative or very close to negative money flow on the S&P 500, DJI and Nasdaq 100 indexes. From this point we may expect negative trading tomorrow at the market open. However, emini index futures are already traded now about half of percent up which, on other hand, suggests positive trading tomorrow at the open.

I would continue monitoring US Dollar index, as it looks like S&P 500 index continues to move in opposite to this index direction.

Volume and Money Flow

The indexes did not bounce up (as I expected) after extremely lowadvance/decline readings seen on May 14, 2010. Last week I listed bad and good things, on my opinion, and if we compare the previous week decline with the recent week decline we may say that the difference is that the decline on May 20, 2010 was supported by big bearish volume surges. High volume surges during such decline are a very good sign to support extremely low advance decline reading.

Overall, there are several very strong signals as I see:

1. Extremely low NYSE Composite and S&P 500 advance decline readings on May 20, 2010 would suggest strongly oversold condition and possibility of up-move.

2. High volume on May 20-21, 2010 suggests that many investors started to buy attracted by low priced stocks.

3. On May 21, 2010 we may see change in the money flow toward bullish side.

4. McClellan Oscillator became positive which suggests that majority investors are focused on the advancing stocks.

5. The biggest positive signal for me is price's behavior on May 21, 2010. The indexes (Nasdaq 100, S&P 500, DJI and others) started session strongly down, during the first five minutes of trading they generated huge trading volumes and then on low volume the price went up. That tells me that the market went down to kill stop-loss orders and then when all stop-losses orders were eaten the price went up because of luck of bearish traders.

There is only one thing that on my opinion is not very nice - is a big number of low advance /decline reading over the short period of time. This is not a very good sign. Even if I am right and we will see a recovery, I would be very cautious and I would watch that recovery closely.

Advance Decline Analysis

Overall, we had quite a positive week with the exception of the last trading session on Friday May 14, 2010 when indexes declined strongly: S&P 500 - 1.85%, Nasdaq 100 - 1.97%, DJI - 1.49%, NYSE Composite - 2.15%, etc.

The good news is that it was not 3% or stronger (as we had before) decline and biggest part of trading session on Friday was in side-way range. The bad news is that it still was a strong decline and it pushed volatility trend up again.

Let's take a look at the Friday's decline from the prospective of my technical analysis and what I would expect to see. I emphasize on my and I because it is my personal opinion and my personal analysis which may not necessary goes along with analysis of other "professional" traders, investors and or advisors. I always recommend (before relaying on anyone's analysis or recommendations) checking the charts and doing some analysis by yourself and only then you can create your own opinion which may be based on the analysis results of others or may not. But it will be your opinion and at the end you will be investing your money.

Below I tried to summaries negative and positive aspects of Friday's decline and how it possibly may affect future trend.

• Advances and Declines: We had extremely low NYSE Composite and S&P 500 Advance/Decline reading as a rule such low readings suggest strongly oversold condition and in most cases we may see strong bounce up after this. This is a good sign and we may see bounce up and recovery to the April’s high levels and even higher.
  
  The bad thing about it is that this is fifth occurrence of such low advance/decline readings over past one-month period: on 4/16/2010, on 4/27/2010, on 5/4/2010, on 5/7/2010 and on Friday 5/14/2010.
  
  After April 16, 2010 we had 5-session up-move; after 4/27/2010 2 days of strong recovery; after 5/4/2010 no bounce up and after 5/7/2010 we had 3 days of strong up move. Now after 5/14/2010 low advance/decline readings I would expect to see bounce up as well. Yet, the bad thing is that we witnessed too many such low advance/decline readings within short period of time. Usually it happens at the bottom of down-trends or before begging of a long-term downtrend. Such frequent occurrence of low advance/decline readings in many cases is considered as a pre-signal of possible radical changes in the longer-term trend.
  
  I do not want to scary anyone that we are on the edge of new stock market crash. As I mentioned above, it could be played both ways. Personally, I would expect to see the indexes moving up to the April's highs and even higher, however, if this is not the case then I would be very cautious about longer-term trend.
• Volatility: Volatility on daily charts (1 bar = 1 day) continue to remain at high level. Volatility is not moving up which is good, however it does not decline which is not good (it moves sideway). I already mentioned several times in my previous posts that I would like to see a decline in volatility and only then I would be more bullish.
• Volume: Friday's decline did not generate strong bearish volume surges. From one side the indexes do not need strong bearish volume surges to move higher, because we already had very strong bearish volume surges during the decline on May 6-7, 2010. From other site it still would be nice to have some bearish money flow accumulated during that decline.
• Other Technical Indicators: Other technical studies (Stochastics, RSI, MACD, etc) are mostly bearish by suggesting possibility of further slide. However, I would count on the fact that majority of them are lagging indicators (signal changes in a trend after it happen) and taking into account current high volatility level we may see sudden and strong change in a trend and the sentiment could be changed very fast from currently bearish into bullish.

Overall, at this moment I base my technical analysis on the advance/decline data. Because of the low advance decline readings we had on Friday May 14, 2010 I would expect to see the indexes higher than where they are now. Yes, we still may see some decline, yet, on my opinion market has to bounce up. Then, depending on how strong and volatile the bounce is, I would build my further technical analysis.

Volume, Advance Decline and Volatility

I have decided to make a quick post - something that I usually do not do during the week. As a rule, I update my blog during week-ends, yet, there is some stuff on my opinion worth mentioning.

I would recommend checking three things:
a) today's daily volume on indexes (Nasdaq 100, S&P 500, DJI and others);
b) advance/decline issues and volume readings on the S&P 500 and NYSE;
c) volatility level on indexes (the same set - Nasdaq 100, S&P 500, DJI)

You may try to compare today's decline with decline we had on April 16, 2010:
1. The same as on April 16, we had very high volume surges during the indexes' decline, yet these volume surges are not as big as those that we saw on April 16, 2010 (today's volume signal is weaker).
2. The same as on April 16, we had today extremely low advance/decline issues and volume readings on the S&P 500 and NYSE indexes, yet today's readings were much lower (more extreme - today's advance/decline signal is stronger).
3. Current volatility is growing and is higher than we had on April 16, 2010.

The first two points above would suggest bounce up which could be similar to the one we had after decline on April 16, 2010. The last point (volatility) suggests that we could be on an edge of a strong correction. I think, there will be a reaction on the first two signals (volume and advance/decline signals) as some up move. I would not try to guess now how strong this up-move could be. If I do not see an up-move reaction then I would not expect to see a strong correction.

Advance/Decline

It was clearly bearish week. In my previous week "S&P 500 Chart" post on January 18, 2010 I  have stated my points, why do I believed in to coming correction. The main my point was an increase in volatility. By following my words, we had strong advance on Monday, which only moved volatility level higher, and as a result the strong decline for the rest of the week. On Thursday January 21, 2009 in my "Volume, Volatility and Advance/Decline" again, I have confirm that this does not looks like the end, mainly because advance decline reading did not hit critically low levels by indicating panic selling. As a result, as I mentioned the previous post "the next move down could be even stronger than we had over the last two days" Friday, the last day of the week, brought us even stronger decline.

One more time you may see an importance of monitoring several technical indicators at the same time. In my understanding professional technical analysis combines analysis for the price, volume, volatility and advance/decline data. One may say that he/she can use a price indicator with success. However, without volume, advance/decline and volatility technical analysis I do not believe it is possible to define the current trend stage, to see where the stock market is moving, predict possible strong changes in a trend and be on the alert when market, index or stock may crash. Only combined analysis of volume, advance decline and volatility data may give you one step ahead vision. Those who disregard these data, I believe, sooner or later, will be caught by the week similar to the one we just had.

The same is with indexes. Even if you do not trade indexes (ETFs and other index tracking securities), you have to monitor and analyze them. If your stock was generating buy signals this week and you did not understand why it did not move up, then by taking a look at indexes you would understood that the general bearish sentiment took over the stock market and your stock was drugged by the general stream of the market.

Coming back to the technical analysis, I would like to say that on Friday January 22, 2010, the S&P 500advance/decline readings did dropped to the extremely low level by indicating strong panic selling. We have not seen such low advance/decline reading in the S&P 500 sector since November 27, 2009. The indexes and market may go further down, however, the history analysis (that is done since 1997) shows that at this point we may see a strong bounce and resumption of the up-trend – unless there is a stock market crash (I do not think that this is the case).

Another point is very strong daily volume over the last two days of the week. On those days, the daily volume in the Nasdaq 100 and S&P 500 sectors were the strongest one since December 18, 2009, and on DJI it was the strongest daily volume since December 4, 2009. If we see e decline in volume activity, the principles of volume based technical analysis would suggest that the panic is over and we may see a reversal.

Taking into account volume and advance/decline indication I would not risk by holding the short position right now. The only what I would accept is a trailing stop which would protect earned profit and would give a chance to make more. Yes, we still may see slide down or we may see modest advance and then decline to the new lows. However, I think we are close to the bottom of the recent decline.

I am not stating that we are at the longer-term bottom and over the next few months we will have bullish market as we had after November 27, 2009. We can have it, but it is not necessary has to be the case. We can have just bounce to the most recent high (January, 2010 highs) and then we can have slide again. I do not know what is going to happen in a month. Even if I look on longer-term charts, my view is always adjusted by new coming data and could be completely changed. Right now my technical analysis tells me that we could be close to the bounce up. If this happens, then we will take a look at the next step which, in my case, would be based on the combined technical analysis of price, volume, advance/decline and volatility data again.