Dollar Up - Stocks Down

As I mentioned yesterday, despite the fact that some technical indicators show bullish signals on intraday time-frame, sometimes it is useful to take a look at longer-term time-frames. Yesterday’s bullish signals were caused by the yesterday’s afternoon rally. Yet, when longer-term sentiment is bearish we may have strong swings down as we had today at the market open.

This is common misunderstanding when a trader asks to give him/her one chart setting that would work all the time. If you locked in one indicator, in one chart time frame, sooner or later you will get caught in the situation like today’s drop down and all your profits will be wiped out. You always have to look beyond time-frame you trade. This is what helped me yesterday to avoid playing long. Yes, I did not play this morning’s swing, so what – I did not lost and I had plenty of time at the morning to reanalyze the situation.

At the current moment the technical analysis is bearish on all time-frames. The Advance/decline on the S&P 500 and NYSE Composite indexes readings are extremely negative as well. The good news for Bears and bad news for Bulls is that the today’s decline, so far, have not generated any volume surges. Absence of increase in trading volume during decline suggests that current decline does not generated panic selling yet.

US Dollar index is up by breaking its high seen on November 16. As I numerously mentioned over the last month, stronger dollar supports correction down.

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.

NYSE Advance/Decline Readings

The indexes are going to open modestly higher, which should be logical after yesterday's strong selling. There are some bullish signals in the 1-min and 5-min index charts, yet, the 15-min, 30-min and hourly charts remain bearish. I would continue monitor 5-min chart in parallel to the 15-min charts to see if during the morning up-move indicators on 15-min chart turn into bullish - it would indicate a possibility of stronger bounce up.

A few interesting points that I would consider worth attention.

- Yesterday we had strongly oversold (extremely low) advance/decline issues and advance/decline volume readings on the NYSE Composite and S&P 500 indexes. As a rule after that we may see bounce up.

- Volatility on the longer-term frames is rising which is bearish sign.

- We had 2-day up-move in US Dollar index. Up-move in dollar favors bears.

Volatile Markets

I mentioned a week ago in the "Trading strategy" post on August 8, 2010: "even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used.... If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears." - this is exactly what happened on August 1, 2010 - the lows were broken and the indexes continued to decline.

Now, majority of technical indicators are bearish and suggest good odds of further decline. Yet, as it always happens in case of technical analysis - there is always something that points in opposite direction.

In the current situation, on August 11, 2010, the strong decline has generated great bearish volume surge. In addition, on that day we had extremely low advance/decline volume and issues readings. If we compare August 11 to July 16, we will see that even smaller bearish volume has pushed indexes up. Furthermore, there is still a possibility that this volume may cause up-move. At the same time, from the bears prospective of view we may say that volume and advance decline signals on August 11 were too close to the recent highs to consider them as strong bullish signals. Another point is that even we had extremely low (extremely oversold) advance/decline reading in the S&P 500 and DJI sectors, the NYSE composite advance/decline volume was not even strongly oversold - yes, it was bearish but not strongly.

Overall, 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.

Another aspect that should be considered (on my opinion) is that 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.

P.S. It does not looks like we have quite summer vacation trading...

Oversold?

When the market goes down it triggers stop-losses set by traders. The job of a broker is to close a position when stop-loss order is triggered. A broker does not have to close a trader's position at stop-loss price - a position should be closed at any available price. Still, under usual circumstances if a stop is hit a position is closed at stop-price. However, if a big number of stop-loss orders are hit in a short time span and brokers have to close position of many traders and sell billions of shares and there are no enough buyers for these shares than those shares crash down until they are price low enough to attract buyers to buy them. That is how market may suddenly crash and that what most likely happened on Thursday May 6, 2010.

Now from technical analysis prospective we have strongly oversold volume and advance/decline signals. You may see very strong bearish volume surges in all market sectors: in NYSE, S&P 500, Nasdaq 100, DJI, etc. Actually, NYSE Composite trading volume on May 6, 2010 is the highest daily volume since October 10, 2008. At the same time you may see strongly oversold advance/decline readings on the NYSE Composite and S&P 500 indexes on May 6-7, 2010.

There is no doubt that the market has become strongly oversold during the recent crash down. There is enough oversold power to push indexes strongly higher and I would expect to see this move. However, majority technical indicators remain bearish indicating bearish mood among traders. In this case it could be good idea to wait at least for a few signals that would confirm a reversal. Personally I would be looking for decrease in volatility and change in the direction of the money flow.

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.

NYSE Advance/Decline

Scary drop, isn't it? In my previous "Technical Analysis" report I have expressed my opinion about oversold market and possibility of recovery. Actually we had 3 days of up-move, yet, it was quiet recovery not a strong one as I expected. Today, in one trading session all gain of the previous 3 days has been wiped out. That is why I always mention that charts should be monitored on daily basis which should provide you with ability to spot in time changes in the sentiment.

From one side today's drop is very scary and I am sure it pushed many traders into panic. From other side it completes the picture. I usually do not make posts during the week, yet today is very nice days from the advance/decline data prospective. Today advance decline volume and issues data have hit very low levels. It happened not only on the S&P 500 index but on all major indexes and exchanges. It was on October 15, 2008 when I saw last time such low advance decline readings on the NYSE Composite Index. Other low NYSE advance/decline readings (yet not as low as today) were noted on November 12, 2008 and on July 22, 2009.

History shows that such low advance/decline readings, especially in the NYSE Composite index, suggest strongly oversold market with high odds of close recovery. So, even the today's drop looks very scary it made me optimistic and I would not bet anything on short trading now.

For reference: Advance/Decline Quotes.

Oversold?

Unexpected news and unexpected crash, at least for me. Yet, after the reading the news at the morning we know the market reaction on them. We’ve already been there in January 2008, and we already witness July 2008. This is the third financial company that is suffering. In both previous cases we saw it at the very bottom and then we had a strong rebound.

The last two trading session we had extremely high activity (trading volume) on the stock market which could be compared to the daily volume in the January 2008 and July 2008 only. Let's take a look at some historical record daily volume numbers below:

	NYSE	S&P 500
1st Place	January 22-23, 2008	January 22-23, 2008
2nd place	September 8-9, 2008 (now)	July 15-17, 2008
3rd place	July 15-17, 2008	September 8-9, 2008 (now)
4th place	July 11-16, 2008	July 11-16, 2008
	AMEX	DJI
1st Place	July 15-17, 2008	January 22-23, 2008
2nd place	September 8-9, 2008 (now)	January 16-18, 2008
3rd place	July 11-16, 2008	September 8-9, 2008 (now)
3rd place	January 22-23, 2008	July 15-17, 2008

Isn't it interesting... I always associate high volume surges during the price slide with panic selling and extremely high volume - with extremely panic selling which lead the market into heavy oversold stage and as a result into strong reversal..

Based on the volume technical analysis (numbers above) I can set a few points for myself:

• I believe that we are at the bottom;
• I'm expecting to see very strong and sharp recovery;
• I assume that we may see further slide (there is always a possibility of that), yet, I believe, soon we will see the stock market much higher than we are today and than we were yesterday;
• I consider it's extremely risky to be in short now - personally, today, I would rather open a long position than tried to make some money by playing down;

Again, my technical analysis is my subjective view on the stock market. I do not recommend follow it, do not relay on anyone opinion - do your own home work, at the end if you lose you lose your own money.

Technical Analysis - New Highs and New Lows

As I mentioned several times I believe that it is important to understand the nature of the technical studies in order to properly use them in technical analysis. Use of indicators without understanding the principles that move them may lead into situations when a trader starts to blame an indicator for fake signals.

New Highs & Lows indicators are from the group of Breadth indicators and they represent the number of all stocks reaching the new 52-week highs or lows. These indicators are applied to the indexes and exchanges only (to the basket of stocks) - they cannot be applied to an individual stock.

Initially the New High/Lows indicators were applied to the New York Stock Exchange (NYSE). Now many traders started to apply it to the S&P 500 index which is well known as one of the best indexes reflecting stock market sentiment.

So what does New Highs and New Lows show?

I would set 4 basic principles behind these indicators which summarize my understanding of the New Highs and New Lows based technical studies:

1. When we see that the number of new highs increases and the number of new lows decreases during the price advance we have to understand that the bullish sentiment is dominant on the market. Basically we see that the number of stocks making new highs (moving up) increases and it attract investors to play up. Every day we see more and more stocks involved into uptrend and there is a possibility that the index will continue to move up.
2.  When we see that the number of new highs declines and the number of new lows raises during the price drop we have to understand that the bearish sentiment is dominant on the market. Basically we see that the number of stocks making new lows (moving down) increases and it attract investors to play down and possibility of further crash is still high.
3.  When we see that the number of new highs started to decline and number of new lows started to raise while the index price is still moves up we may tell that some stock from the index basket started to drop after being overbought and this change in the sentiment may involve other stocks into declining movement which may lead the index into the recession.
4.  When we see that the number of new lows started to decline and number of new highs started to raise while the index price is still moves down we may tell that some stock from the index basket started to advance after being oversold and this change in the sentiment may involve other stocks into a recovery process which may lead the index and majority of stocks from this index into the new up-trend.

here are 2 popular technical indicators based on the New- Highs and New Lows numbers - New Highs/Lows Oscillator and New Highs/Lows Ratio:

New High/Lows Oscillator = New Highs - New Lows

New High/Lows Ratio = (New Highs - New Lows) / (New Highs + New Lows) * 100

By applying the principles discussed above to the oscillator and ration we may say that:

1. When then the New Highs/Lows Ratio or Oscillators moves along with a price moving average (price trend) it confirms the current trend.
2.  When we start to see the divergence between the New Highs/Lows Ratio or Oscillators and price moving average it could signal about coming trend reversal.

Comparison of the New Highs/Lows to the behavior of the price moving average helps to look beneath the surface and can often warn about coming trend reversals. Yet, investors should be very careful with applying New Highs and New Lows based technical indicators to the basket with the small number of stocks. Such indexes as Dow Jones Industrials (DJI - basket of 30 stocks), Dow Jones Utilities (DJU - basket of 15 stocks) and Dow Jones Transportation (DJT - basket of 20 stocks) may lead to confusion since in majority of the cases we may see only making New Highs (New Lows = 0) or only making New Lows (New Highs = 0) stocks. To simplify the analysis and help with analysis of the small basket indexes, the moving average could be applied to the New Highs/Lows based technical studies.

Another point is that an investor (trader) should understand that New Highs/Lows indicators are based on the daily data and it could be difficult to use them on the intraday level. It would be logical to use them on charts where 1 bar equal at least to 1 day - lower timeframes become less informative.