Dow Jones Industrials

Another week is behind. Following my previous week "DOW Chart" post I may say that my worries abut further slide were confirmed. In that post I mentioned that the stock market is oversold and we may face a reversal soon, yet, I put a few condition that would be nice to meet before a reversal is confirm. One of this condition was McClellan Oscillator crossing zero line and the other one was presence of  negative MVO which would reveal the high volume surge (panic selling) during decline...

So, what do we have now? - We see that both of these conditions are met and we already saw some recovery. By taking a look at the same set of  technical studies I used a week ago I may say that technical analysis based on these indicators is Bullish. If a week ago the indicators show oversold market yet they were negative, then right now they still show oversold market but with Bullish sentiment which makes me believe that the odds are on the side of the recovery. The small exception is the S&P 500 index which is bullish but not as bullish as Nasdaq 100 and DJI indexes.


There are two positive factors for me that I would like to highlight.

a) The same as on October 9-13, 2008 and the same as on November 19-24, 2008 we saw high volume activity in the DJI sector on January 14-16, 2008. I always stated and I repeat myself - I associate high volume surge during decline as panic selling. Yet, because volume is always two side transaction and there is always a buyer for each seller, high volume during the decline tell us that the buyers started to satisfy demands of the panic sellers by buying from them in huge amounts and as a rule that leads to the shift in the supply/demand balance when those who wanted to sell already sold and do not push market down in panic any more.

b) Second positive factor is that in 2008 each time we had huge volume surge and reversal it was lower than the previous support level. This is the first time when we have huge volume activity which is above the previous support level. If we have a reversal now, this is going to be the first reversal which will set new support level that is higher than the previous support (support on November 21, 2008).

I usually do not give any advices, however, for long-term traders, for pension investors there is simple trading strategy which has only one rule: "Buy each time you see huge volume surge during price decline". As I mentioned in October 2008 (read my "Long-Term Investment" post) and as I stated in November 2008 (read my "DJI Analysis" post) I would say again - I consider it is good time to consider... Yet, if you believe that USA economy is going to crash further and never recover back, if you believe that this is only a beginning of the end (there is always a possibility) then you should stay away from any type of investment...

Again, I could be wrong and I'm not an investment advisor, so, do not trust me and do not trust anyone when you invest your money. Do not make any trading decision on what I told above - do your own home work.

Stock Market Crash?

My yesterday's and today's post look like exception from the rule. I do not usually make any comments in my blog during the week. Yet, I do it now because of the changes we see in the stock market and I need to put my thoughts in the correct order. Writing down a few points usually helps me with it and keeps away my emotion from my technical analysis.

In my "Nasdaq 100 is Behind" post on July 1, 2008 I described two possible scenarios on my opinion of the coming reversal. Over the past week we saw developing of the second scenario where the Nasdaq 100 pushed indexes lower. I mentioned that in any cases I would watch for high volume surges that may indicate the end of the downtrend and possibility of a reversal. Yesterday, in the "Advance Decline" post I have pointed on the interesting Advance/Decline behavior and high volume surges. I do not think that today's strong and sharp recovery should be a surprise.

I believe, the main question for me now is to consider if today's strong up-move is a beginning of the recovery or it is just volatile market before further slide...

By looking at my favorite 60-day charts (which I use to analyze 2-10 days trends), after today's rally I may say that all my technical indicators are bullish and point to the higher possibility of the further development of the recovery:
- SBV started to move up;
- I see big number of volume surges during the recent decline;
- McClellan Oscillator is on the up-side;
- Stochastics and RSI bullish as well;
- Advances and Declines points to up-trend;
- VIX Volatility index dropped down.

What I like is that all the indexes (Nasdaq 100, S&P 500 and DJI) show similar bullish sentiment on all technical indicators. Basically, my technical analysis points the higher odds of up-trend.

Yet, there is two things that makes me worry and which will press me to monitor charts more closely:
1. Today's rally was on the high volume which may push the stock market down again.
2. It's a rare situation when the market make a reversal from the down-trend without at least second attempt to hit the bottom.

Basically, I see 3 scenarios of the possible further development:

Scenario #1: Stock market reacts on today's volume and continue to decline. I would be very difficult for the market to do it due to the high oversold state. It's difficult to believe that today's advance relapsed all oversold power and hifted stock market into the oversold state. Personally, I would not expect to see that scenario, yet, there is always a possibility of me being wrong.

Scenario #2: The stock market continues to move up by ignoring the today's high volume during the advance. The market is at high oversold levels and it has power to continue the rally.

Scenario #3: The today's' volume slows down the advance and the stock market continue to move up and then side way with further drop and retesting of the most recent lows and collecting more volume before final reversal.

I believe the next few trading session will more reveal the intends of the market. It would be nice to see drop in the trading volume as a confirmation of the recovery.