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

Market Crash

Very nice volume we had today during the crash. It does not matter what was the reason, "computer glitch" or Greece crisis, the market hit down eat, all stop-losses and when there were nothing more to eat it bounced strongly up. Such strong volume means that the institutional traders were buying from those who placed stop-loss orders. All this high volume mean that, now, most likely we have oversold condition when we may have luck of bearish traders to support further decline.

It was crazy day, It was almost impossible to buy (many orders bounced back canceled), still, I like it, because such huge volume surges are clear signals of possible reversal. We still may see some volatility and maybe some decline, yet, I would expect to see the indexes (DJI, Nasdaq 100, S&P 500 and other) moving up.

I'll try to post my view of a "computer glitch" during the week-end.

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).

Stock Market Regulation

I'm a simple trader and this is just my thoughts. I'm not an expert, yet, on my opinion government and SEC has to do something to protect stock market from tragic and devastating crashes and only then pump money in the economy. Not to be judged as a person that screams only (based on my previous "Stock Market Crash and Regulations" post), below I set a few points that I think could protect the stock market from devastating crashes. Of course it's not my job - government and SEC could do better and I hope they will do:

1.  Banks should be separated from the trading on Wall Street. The purpose of the bank is to provide money communication between people, companies and government. If the banks start to play trading games on the Wall Street and then bank's trading losses on may affect the main purpose of the banks and the economy as a result. We can have investments banks and other investments institutions, yet, they have to be separated from the banks that provide money communication between people and businesses, that lend money to the people and businesses, where people and businesses keep their savings.
2.  If the market has dropped for more than 10% in three consecutive trading session the SEC has to prohibit playing short (selling stocks short, buying put options, selling naked calls .....) for the next three trading days and whoever is in the short position has to receive a margin call to close the short position within these three days. There are a lot of traders and hedge funds who can turn small decline into a devastating stock market crash. I am sure that the SEC may come with better numbers, yet, I believe that we need some rule to protect the stock market and the economy from the big players who has big money and who does not care about economy crash if he/she can make money on it. People should be able to trade short, yet, in the moments when stock market crash starts to affect the economy people should not have interest in destroying the economy. Stock market has to have ability to crash. During the crash market cleans itself. However, the crash should not be amplified by those who playing short or it will be turned into economy damaging process.
3.  Traders, hedge funds, portfolio managers should be prohibited to have more than $100,000,000 ($100 millions) in short position. Exception could be made only for those portfolio managers who has more that 70% of their funds in the long position, then the rest 30% of their funds even if is more than $100M could be in the short position. Wall Street should stimulate economy not crash it. Again, I am sure SEC can come with better numbers.

So, do you think such rules protects the economy and traders from the manipulators who does not care about the health of the economy, or such rules are a threat to the free stock market...

Stock Market Crash and Regulations

Will pumping money in the economy help the economy to recover? Sorry, so far, we were not pumping money in the economy we were feeding the Wall Street. We are told that we have to take a look at the source of the problem and then eliminate it and only after that start treatment. Last year we took a look at the source of the problem and what was done? We have found that the main reason of the stock market crash is unregulated market, unregulated trading, unregulated Wall Street. We are told that the main reason is bad mortgages, however, who generated these bad mortgages??? Nobody even talks about that, in opposite we continue to feed unregulated animals. Why??? Will it help to recover??? We bail out a lot of public companies, and they continue asking for more money. Did nobody get it?

It could be weird that a trader is asking about more regulation on the market. We always were threatened that regulations mean end of the freedom. Wrong!!! Freedom starts with regulation and rules. We have police on the street, we have driving rules, we have judges and courts, we have criminal and civil laws - does it mean we are not free??? FREEDOM NEEDS TO BE PROTECTED. That is why we have all of this. The same is in the stock market. Free trading, free stock market has to be protected. When I mention about rules and regulation on the stock market I mean rules and regulations that protect economy from bubbles and crashes, rules and regulations that protects the investments from the stock market games.

After the Stock Market Crash in 1929 the following regulation were implemented:

1. The Securities and Exchange Commission (SEC) was established;
2.  The Glass-Stegall Act was passed to separated commercial and investment banking activities.
3.  In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

In 1987 after the stock market crashed, again we saw new regulation intendment to protect investors:

1.  Uniform Margin Requirements;
2.  Circuit Breakers. The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.

After Stock Market Crashed in 2000 new rules for day traders were introduced. Apparently previous Government was not able to do more.

We have recent stock market crash, NOTHING DONE. Haven't we learned anything from the recent crash?

DJI Chart

Despite my bullish last week outlook (see the "DJI" post on September 22nd, 2008) on the stock market we had the attempt to retest the September 18, 2008 lows. Yet, the market did not hit the bottom, in opposite the DJI (Dow Jones Industrials) recovered half of the weekly decline during the last two trading session. Sometimes I have feeling that it would be much better if they did not even announced the bailout than announced it and then started to play political games around it....

During the past week we had strong decline. Because of that I decided to take a look at longer 1-year chart to see if the results of my previous technical analysis are correct.


From the DOW(30) chart above we may see that the magnitude of the volume during the stock market crash is very big. I have already mentioned in my "DJI Volume" post about my understanding of such huge volume. For me it's indication of the strong panic selling that lead the stock market into strongly oversold stage. If you may try to question it on the 60-day chart by pointing that September 19th rally up has released this oversold power, the 1-year chart make me believe that we did not even see the begging of the market reaction on that huge sell off:

• The volume is still very high, which indicates we still have panic and uncertainty in the market. Yes, the last week daily volume is lower than the daily volume we saw in period from September 12 until September 19, yet it still far above the average daily volume over the past year.
  
  - The fact that the volume is down tells me that the moment of worst fear is over and there are not as many sellers as we had on September 17-18, 2008. Y
  
  - Yet, the fact that the volume is still high tells me that there are still a lot of sellers. However, as I always mention - if we see volume then somebody buying from these panic sellers and the fact that DJI is about 5% up from the September 18th low tells that the power of these buyers is bigger...
• The same with VIX (Volatility index) - it hit the top on September 18 and now it's down and moving flat. It does not move up any more which is good sign. VIX still at high level which indicates highly oversold market. We did not see the VIX moving down which confirms we did not have yet the recovery reaction on the oversold market.
• MVO is red. We do not see green MVO. That means that we had high volume surges during the price decline (panic selling) and we did not have yet high volume during the price advance (greedy buying).
• Low SBV indicates negative money flow. Yet it declines which suggest weak market, however very low levels suggest possibility of very strong recovery.
• MACD and Stochastics are in the recovery direction.

Overall, my 1-year technical analysis is bullish (in spite the last week 3-day decline) with exception of the SBV that could be considered bearish due its decline. I would still stay on my point highlighted in my last week post that I expect to see the recovery.

Panic Selling - Oversold Levels

Starting from the middle of July (see my DJI post on July 20, 2008) I have been accepting the high volume surges during the June-July 2008 market crass as extremely high panic selling that pushed the stock market into the heavily oversold stage. As a result of this heavy oversold level we had the recovery, yet, the recovery was not as strong as I expected. It's one and half month since the market hit the bottom and because of that I pushing myself to take another look at my longer term charts to see if there are any changes in the stock market sentiment.

By analyzing the S&P 500 and DJI indexes we may see a lot of similarities, yet, the Nasdaq 100 1-year chart has completely different picture.  No wonder that over the last month we had a lot of trading session when the Nasdaq 100 index was trying to push the market in one direction while the S&P 500 and Dow Jones Industrials were struggling to run in opposite direction.

The technical indicators on the Nasdaq 100 chart (see my set of indicators in the "New Highs/Lows" post on August 12, 2008) are not very optimistic at that point of time. Because of the last two weeks, the technical analysis of the Nasdaq 100 index gives the Bearish outlook. Taking into account that in July 2008 the Nasdaq 100 companies were not as oversold as the S&P 500 and DJI stocks it make the picture for the Nasdaq 100 even more Bearish.

At the same time the S&P 500 and DJI technical analysis still points to the higher odds of the Bullish market. In addition to the technical indicators, if I start to compare the January and March 2008 S&P 500 volume surges (panic selling) with July 2008 volume I clearly see that panic selling in July was far more extreme than in January which leads me to assume that in July the stock market reach stronger oversold levels than it was in the beginning of the year. As a result of the January and March oversold levels we had strong recovery where the S&P 500 run more than 10% up. Now, when I saw several times stronger oversold levels the S&P 500 recovered only around 7%... For me it's difficult to accept that this is over and overall, I still believe that the market has more room for recovery, and my longer term mood is still bullish. Yet, the further we go from the middle of July (bottom of the stock market crash) without recovery, the more often I will be looking at the longer term charts to see if there is any changes in the market sentiment.

Charts Technical Analysis

Another, crazy week is behind. We saw strong slides and we saw strong recoveries. The feeling that the stock market is manipulated was following me the whole week - the indexes declined even when the majority of stocks were in advance - on one day we had a news on Government attempt to give a help to financial institution on the next day we hear that these institution do not need such help. How many else surprises wait for us?

Overall, despite all negative pressure, all negative news the Nasdaq 100 index slide down only 5 points (0.3%) over the week. Keep in mind that the Nasdaq 100 index is a basket of 100 non financial companies and as a result less affected by the financial sector than the S&P 500 index and DJI index. As a result of the week the DOW index lost 188 points (1.7%) and the S&P 500 index lost 23 points (1.9%).

The question is what will the next week bring to us? Will the financial companies be able to push the stock market deeper down despite the heavily oversold stage? We saw such attempts during this week, yet we saw that the rest non financial part of the stock market tried to move the market up (we witnessed a few attempts of strong recoveries).

Last week (see my previous "Stock Market Crash" post), based on the technical analysis of the 60-day chart I have made an assumption about a possibility of the strong recovery. Yet, the market is still down. Intraday market crashes, when the Nasdaq 100 index dropped for 3% (on Friday July 10), made traders to believe that the market was going to crush even more, and I think not a lot of traders accepted the same strong recovery later on the same day as a sign of the oversold market. I think that majority of traders still believe that the market will go further down and they do not dream even about a small recovery. Maybe they are right, maybe the stock market will be lower, yet I do not think that it’s going to be "tomorrow". As I mentioned before, I see the extremely high oversold levels and on my opinion we are on an edge of a strong recovery. Even if the market tends to be lower, before, I believe it has to release some oversold power in a recovery movement.

If we compare the October 2007 – January 2008 stock market crash, with current May - July 2008 down trend we will see different price behaviors. If during the Oct-Jan crash when the indexes dropped for 2% then in majority cases they continued to drop even further. However, during the current down trend very often we witness the scenario when the indexes dropped down for 2-3% and then they moved up in strong recovery within a single session (especially over the last two weeks). It tells me that the market is driven down by a few negative companies (like Fannie and Freddie) while the rest of the market tries to recover from the heavily oversold levels. That is why I have put a question above for how long the financial companies are able to push the stock market deeper down despite the heavily oversold stage.

In order to review my position about the current market, this week, I decided to take a look at yearly index charts to see the longer term tendency of the stock market.

Chart #1: Dow Jones Industrial Index (DJI) 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)



Chart #2: S&P 500 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)
 

Chart #2: Nasdaq 100 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)


Personally, looking at technical analysis of 1-year chart I would consider it risky to play short at this point of time.