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.

Nasdaq 100

Last week in my "Advance/Decline" post on January 24, 2010 I have expressed my thoughts that taking into account volume and advance/decline indications on main indexes (S&P 500, DJI, Nasdaq 100) we could be closed to the bottom of the current correction. However, the past week was negative.

The Nasdaq 100 index was the main player who pushed the market down. The Financial Sector (see S&P Financials), Housing Sector (see PHLX Housing Index) and some other market sectors were flat. The S&P 500, DOW indexes (DJU, DJI, DJT) where flat the first half of the week yet slides by the end of the week under the pressure of the hi-tech companies from the Nasdaq 100 index.

You can hear in the media that the market is upset by the political balance, that Wall Street was worried about Bernanke re-election, that banks were upset by the proposal of the additional taxes, etc. I just do not buy it - those news are not the news that moves market.

Take a look at the Nasdaq 100, DJI and S&P 500 5-year chart. The Nasdaq 100 index during the 2008 stock market crash had smallest loss, there were no big volume surges during the stock market crash and the Nasdaq 100 had strongest recovery after the crash. What does it tell? It simply tells that the main panic was in the financial and transportation sectors. That is why S&P 500 and DJI crashed stronger. The big investors were desperately pulling money out from these two sectors - that is why we may see huge volume during the crash on the S&P 500 and DJI indexes. Big investors were not pulling funds out of the Nasdaq 100 companies - there were no huge volume surge in this sector during the stock market crash. In opposite the big investors were relocating funds from the transportation and financial sectors into hi-tech companies. That is why the Nasdaq 100, Nasdaq Biotechnology, Nasdaq Computer and Nasdaq Internet indexes completely recovered by the end of December 2009 from the 2008 stock market crash.

Now when the Hi-tech sector was at the top, the some of big investors started to take profit out. Does it mean we will see another strong down-trend? Not necessary, for this we need to have strong panic news like bubble in housing sector (2008), internet bubble (2000), etc. Yet, I think the period of the recovery rally on the Wall Street from the stock-market crash could be over and now we could see something like we saw in 2004-2006 - quiet up and down trading with positive or negative bios until somebody make a new bubble.

Long-Term Technical Analysis

As was promised in my previous "Simple Trading Strategy" post, I am bringing to your attention some points from my personal longer-term technical analysis.

Various techniques are used to analyze the stock market long-term trend. Some analysts focus on 5-year to 10-year charts, others focus on economic factors, etc. I would like to draw your attention to the interesting on my opinion fact that could be seen on daily charts (1 bar = 1 hour).

In the S&P 500 chart below (the Nasdaq 100 and DJI charts are very similar to the S&P 500 chart), you can see that the stock market has been in a recovery movement since the first half of March, 2009. This is when the "2008 Stock Market Crash" ended. Since then, the stock market has been in a steady upward movement, interrupted by shallow corrections from time to time. If you take a look at these corrections, you will see that the further from the bottom indexes (S&P 500, Nasdaq 100, DJI and other indexes) are, the smaller are the overbought signals that are required to push the stock market into a downward correction. You can see that this divergence between price's new highs and technical indicators (price makes new highs, but smaller, overbought indicators signal a correction) on the S&P 500 chart below on SBV, Stochastics and RSI. I think that you may find the same tendency with other technical indicators as well.

The S&P 500 Chart with elements of longer-term technical analysis

Such divergence between price and technical indicators is nothing new in technical analysis. You can see something similar more often in smaller timeframes. It usually can be seen before a stronger change in a market trend. That means that the stock market is not the same as it was six months ago when a majority of shorter-term, overbought signals were ignored, while indexes continued their rally. I am not saying that the market will crash tomorrow - not at all. The indexes and the market may continue to move up. What I want to say is that the market may become predisposed to a change in its behavior.

If this divergence between new price highs and technical indicators continues to develop in the same direction, there could be several possible scenarios: we may face a stronger downward correction than we saw and then the recovery may continue; we may go into a sideways market like we were in during 2004 after a strong recovery in 2003 that followed the 2000-2003 stock market crash; we may fall into a slow depression like there was after 1929 crash; or there could be something new.

There is still another possible development. In the same S&P 500 chart above, you can see that we had two waves of divergence between price and indicators where the second wave was smaller (less Bullish) than the first one. There is a possibility that a third wave of divergence might develop that could be smaller than the second one.

Another factor that could support the above-mentioned possibility of changes in stock market sentiment is timing. It soon will be a year since the recovery began. That means that the period of "expectation beating reports" could be over very soon. During the crash in 2008, many public companies reported losses and, by the end of 2008, everyone had lowered their expectations. Furthermore, in 2009 everyone has had "expectation beating" reports that have attracted investors and money into the market and which feed the recovery. How many companies do you think will report an "expectation beating" increase in profit in 2010 in comparison to 2009? If not many, other economic factors (unemployment, sales, GDP, borrowed money from China, etc) may begin to play roles in the market's direction.

I don't want to dig deeply into a fundamental analysis of the economy and economic factors that move the long-term market. I just want to say that I see some predisposition to changes in long-term market sentiment and market behavior. Since I am not a long-term trader, I am not going to attempt to predict where the market will be in six months. What I'm trying to define right now is where the market may continue its move. Will it move up by going into a third wave of divergence or will it begin to change its trend direction? I think it could become clear by simply monitoring higher-timeframe index charts within the next couple of weeks.

What affects me is how the market reacts to the overbought and oversold signals and how I should adjust my trading strategy in order to avoid encountering an unpleasant situation. If I see that the market starts to react differently to trading signals generated by my technical analysis (my trading system), I usually take a look at longer-term index charts to see the general market stage. Right now, I am looking a little ahead. The indexes (S&P 500, Nasdaq 100, DJI and other) still move up more easily then dropping down and we still may see new highs and further upward movement. Yet, from a prospective of my technical analysis, I see that we are in a period in which the stock market could become predisposed to changes in the long-term trend.

Stock Market Crash - 1974

As a continuation of the series of charts dedicated to the stock market crashes I would like to present the Dow Jones Industrials chart in period of 1973 and 1974 years. In almost 2 years the  Dow Jones Industrial Average (DJIA) lost over 45% of its value - not the worst but still the pretty bad and prolonged recession. The crash came after the collapse of the Bretton Woods system, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. The recession was compounded by the oil crisis in October 1973.

Chart 1: Dow Jones Industrial chart, 1973 - 1974, 1 bar = 3 days

Stock Market Crash - 1987

Another nice picture of the stock market crash in 1987. On "Black Monday" - October 19, 1987 - the Dow Jones Industrials dropped 22.68% in a single session. This was the biggest percentage drop in the DOW history. It is interesting to see the extremely high volume surge during this crash which marked the bottom of the panic selling. Since volume is always 2-side transaction this huge volume indicates that somebody was buying in big volume from desperate traders until the end of October 1987 - in 11 month (in September 1988) the DOW index was back above $2,700 level.

This volume chart is a perfect example of how institutional money collected underpriced shares from traders who was in panic

Stock Market Crash - 1929

I just thought it would be interesting to see the nice charts of 1929 stock market crash. I had opportunity to browse these charts (courtesy ofwww.marketvolume.com) and decided to share it.

As you may see from the charts below, 200 pointsof crash down in 2 months in 1929, then 100 points up for the next 5 months (until May 1930) and then 2 years and 2 months (until July 1932) down to the $40 level. Keep in mind that 200 points at that time is more than 50% drop from the top in September 1929.

Chart 1: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days



Chart 2: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days

Stock Market Crash Stages

As was mentioned before (see my "Side Way Market in May" post) the indexes continue to move in the corridor defined by May 8, 2099 high and May 13, 2008 low. Now, the indexes are close to the upper edge of this corridor: the Nasdaq 100 index has hit this level yesterday, the S&P 500 is still about 10 points below this level and the Dow Jones Industrial is approximately 70 points below.

Only one nice trading session is needed for S&P 500 and DJI to hit this level and if it is broken it could mean that we may see further move up. However, I consider that the odds of the bounce down again are still good. The stock market (when I mention stock market I assume the main U.S. indexes which associated as market barometers: DJI, S&P 500 and Nasdaq 100) has been in a sideway move only for a month. To see the picture better, I may recommend checking higher timeframe index charts - from 1-year to 7-year views.

From the higher timeframe charts we may see that the stock market has been in recovery for 2 months (from the beginning of March to beginning of May 2009) and the whole May the market was basically flat. By comparing recovery after 2000-2002 stock market crash to the current recovery I may say that:

• The recent stock market crash was stronger;
• We had 3 bounces from the bottom in the previous recovery: August 2002, October 2002 and February 2003 (war in Iraq was lunched). We had 3 bounces from the bottom in the recent crash as well: October 2008, November 2008 and February 2009;
• The first recovery wave in 2003 was 3-month long and then the market was in 2-month flat stage. The current move up was 2-month long and we see market in sideway move for a month only;
• In 2003, after 2-month of flat stage, the stock market went up again.

To better understand the stock market crash, recovery process and what could be expected next, I would divide the stock market crash into the following stages:

• Recession: The market is heavily overbought and it starts to move down. As a rule this move down is prolonged in time and this move down is not very scary. See period from July 2007 until May 2008 and period from August 2000 until March 2002. In this period a many investors start to sell, yet there are still investors who buy.
• Crash: As a rule during the recession the bad stuff about companies and economy is revealed and depending on how bad "the truth" is we have strong or extremely strong panic selling. The recent "discovery of truth" about financial companies' manipulation was much scarier than the "discovery of truth" about internet bubbled companies in 2000-2002. In this period we see panic selling - everybody selling and only small part of investors buy. In this period bad, weak and "fraud" companies go bankruptcy and good companies become under evaluated. This period is short and drop down is strong.
• After Crash Clean-up: The market still can go down and we may see bounces from the bottom. In this period investor are still selling, yet, the panic is not as strong as it was during the crash. Many investors (professional traders who see under evaluated companies) start buying attracted by low bargain price, yet, the number of Bullish traders is not big enough to reverse the trend. During this period we still may see "bad" companies go bankruptcy, yet, it's not very scary since, usually, it is an expected bankruptcy and many traders are already prepared to that. For this stage I would refer to periods from July 2002 until February 2003 and from and from October 2008 until March 2009.
• First wave of recovery: There is no panic selling any more. There are still sellers, yet, the number of buyers attracted by low price of good stocks become quite big to move stock market up. Even if we see bankruptcy during this period it will not affect strongly up-trend because all the "bad" companies were already removed from the major indexes. The companies are still under evaluated, yet not as strong and we start to see positive signs in the economy. At the end of this period we may see sideway move or small correction. It could be strong up move in short period of time: see periods from March 2003 until June 2003 and from March 2009 until May 2009.

As I understand (I could be wrong), we are at the end of the "First wave of recovery" and we still may see side-way market or even some drop down (automotive clouds are still on the "stock market sky").

In my next post I'll go back to the shorter term index charts (S&P 500, DJI and Nasdaq 100 charts) to show what my technical analysis tells about shorter-term trends and current market sentiment.

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).

S&P 500 chart

A few days ago in my "DJI Chart" post I have pointed to the possibility of indexes running to the new level which was confirmed by the further recovery. Now, at the end of the week the odds of the correction down have been increased. A month of strong recovery (with the small correction on March 19-20, 2009 only) have been pushed market into the overbought condition (at least for a short-term). Even if stock market is not any longer in the recession, for healthy recovery at least some small corrections are needed and sensitive level drown by me in my previous post is on my opinion a level when we may see at least flat market or correction down.

Technical analysis, based on the standard indicators I usually use, show the buildup of bearish sentiment. All technical indicators (SBV,Advance Decline, Stochastics, RSI and McClellan Oscillator) on the S&P 500 chart below are bearish. If you apply the same indicators to the Nasdaq 100 and DJI indexes you may see similar picture.


Now taking look back on February 9 – March 6, 2009 decline I would separate this decline from the recession and global stock market crash. I still consider that the stock market crash ended on November 21 of 2008. By that day everything was crashing down. Yes, S&P 500 and DJI indexes dropped below November 21st lows, however since then the indexes are not as volatile as they were before and some of the indexes (Nasdaq 100, S&P 400, Dow Jones Utilities...) remained above or at the November 21st lows during the February 2009 decline. I would more consider the February's decline as levelling when some of the companies (financial, automakers) still had to go down while other market sectors (computer, telecommunication, biotechnology, etc.) already hit the bottom and during February 2009 went down only because financial and automakers sectors are very big and their trend influences other companies. Yet, I could be wrong and I would not go deeper into fundamental analysis – this is not my field.

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?

Another bailout?

Another volatile week is behind. I did not expect the market to retest third time the 10/10 (October 10, 2008) lows, yet it is forth time when we see rebound from this level. That is why it's important to monitor charts on daily basis, especially in these volatile days - if I made mistake I have time to reanalyze and correct yourself.

I believe there is no doubt that 10/10 high volume stopped the crash and set support level. From that time we have seen volatile swings between October 10 lows and October 14 highs. Some of the indexes dropped slightly below the 10/10 support (Nasdaq 100) and some of the indexes are moving flat on and above the October 14 level (Dow Jones Utilities).

I believe many investors asking the same question "Will automakers crisis push the market into another crash?". This is another political game and I do not know. My opinion is that what we see now is a direct result of financial bailout. We did bailout banks and now we started to discover that the financial sector did not suffer as badly as it was described - they use bailout money to buy another banks. As I understand, if they do it they were not in the need of cash to be saved... They needed the cash because now when the market is in the bottom it's good time to buy... Now automakers started to follow this example. If you do not bailout us we will crash you - doesn't it remind you something????

I was against bailout of financial sector and I'm against bailout of automakers.

This is my word to you automakers: "DO YOU NEED MONEY? DROP THE PRICE ON THE CARS BY 20% - YOU WILL GET WHAT YOU WANT. IF IT'S NOT ENOUGH THEN DROP THE CAR PRICE BY 50%". When I drive on the street I see thousands of cars in hundreds places. It tells me that you have an asset that you may sell to taxpayers and cover your losses caused by your bad management instead of threatening and asking taxpayers to bail you out... But you won't do it... You do not even think what has to be done to save this industry, what you think is how to get easy money...

What is next

Sorry, no time to make any post during the week... This is not something I use to make money - I use it to put my thoughts in the order. I believe every trader knows that there are periods in the trading when you want run into the forest, find the dippiest hole, hide your head in and wait for a miracle. Usually such moments end with the portfolio crash.

To keep myself in the shape and avoid such situation I have this blog. The obligation to have at least one post a week make me to keep my head clear and to watch the market without emotions. If you see that you may not control your emotion, start a blog. The filling that somebody read what you write will make you to be unemotional and that may help you in trading.

Now, is not a moment for me to run into the forest. I'm happy. If you look at my previous posts the last two days I see exactly what I expected. Telling the truth the market exceed my expectation (see my previous "Nasdaq 100 chart" post). Even today's drop at last 10 minutes of the trading session looks promising (take a look at the volume during these 10 minutes...)

What is next, so far all my indicators are bullish and are pointed toward the October 14, 2008 highs. In such volatile market, the indexes especially the DJI may do it in a single trading session. As I mentioned several times before, only when I see that these highs are broken I can more or less be positive that what we saw on October 10, 2008 could be the end of the stock market crash. Again, I repeat, market is extremely volatile (watch ATR) and if you do not have ability to monitor charts during the day it's better to stay out of the market, unless you would like to invest into long-term (401K and IRA), last week was a good time for that (read my previous posts)...

See more in my weekend post.

Nasdaq 100 chart

I do not know where the market is going to be in a month. However, I'm sure that this not the end of the world and the market must be up  in a couple of years and much higher than it is now. Yes, we could be at the bottom of the recession, yet, as I told before I would not even think about it until I see the indexes moving above October 14, 2008 highs.

I do not know when the market will be even in a week. I such volatile days I can have some degree of confidence in the coming day only. That is why I do my home work on daily basis - I do my technical analysis every day. From the chart below you may see that my 60-day technical analysis looks positive at this moment - the SBV, MACD, RSI, Stochastics and McClellan Oscillator are moving up. Yet, the Bullish sentiment can turn into Bearish on Monday or in  a couple of days... So, watch out... Do not trust me, but do your own home work.

 The technical indicators on the S&P 500 and DJI charts look similar to the Nasdaq 100 technical indicators.

Longer-term charts (1-year, 1.5-year) suggest the high possibility of the strong mid-term recovery. However, it's difficult to say if this is going to happen tomorrow. We already saw that the stock market ignored the extreme panic selling in the middle of September - something very unusual for such huge volume surges. The investors were ready to come into the market and those volume surges witnessed that many traders started to by and that is why we had 10% run up in a single session. The only explanation of sharp change in the sentiment from Bullish into Bearish again I see in the "Bailout news". On my opinion the games around it pushed the market down again.

Will the market react healthy on the current Bearish volume and will go up? I hope so... The history shows that the market always react on huge volume during the price drop by a strong recovery. Yet, what surprise our politicians are hiding? New President will come on the throne in a couple of days... I hope the tax increase will not be his first bill. I'm not against tax increase, but not now. Now, when all businesses are suffering from the crash on the stock market and crash in the financial sector, now, when all businesses are trying to survive, the tax increase may completely destroy them and push the market in so deep recession that we may forget that USA is the world leader... Later, when the economy is stabilized, become healthy and growing, maybe... Bu not now...

I think there is the possibility that the market may wait to see who the new President is and what his intentions are. Nobody wants to invest in a company that may file bankruptcy in a month because of sudden additional expenses (increased taxes) that could be put on the company's shoulders in such difficult time (when the market is in the deep recession).

S&P 500 Chart

As I mentioned in my previous "End of the market crash" post on October 13, 2008 in majority situation after the strong bounce up we may see the attempt of the market to retest the support levels and later this week we witnesses such drop down when on October 16, 2008 the Nasdaq 100 hit the October 10 lows and the S&P 500 and DJI indexes went down close to it. Yet, after that we saw bounce up again and the indexes are still on its way up. I think the question that I put last week "if this is the end of stock market crash" is still not answered. The same as before I would state that October 10, 1008 has put serious point to consider the trend reversal. We had huge volume at that day, the market is in extremely heavy oversold condition, strong rebound has confirmed that market can run up very fast very strongly... All of this make me to consider the high possibility of strong reversal and if not the end of the stock market crash then at least strong mid-term up-trend. Yet, as I mentioned before, I would like to see that the October 14, 2008 highs are broken and the indexes are moving up above them as confirmation of that. Still, for long term investments (401k) I consider that this is good time to buy on such volume when the indexes are so deep down. Even if the indexes will go lower then on the high volume at better position you will buy again. Over the long term the returns from the multiple positions should be rewarded.

Going back to the short-term chart, in my case it is 60-day S&P 500 chart, I may say that the technical indicators are more or less positive and my technical analysis tells me that we still may see some up move. It's difficult to say where the market is going to be in a week. I such volatile market (VIX Volatility index is above 60) we may see strong change in either direction any time. At such time it's especially important to monitor charts on the daily basis. For those who cannon watch charts daily, yet, still would like to make short-term trades I may suggest one thing only - stay out of the market until the volatility is down, your time will come

The S&P 500, Nasdaq 100 and DJI indexes show similar pictures. The reading of the technical indicators on all these indexes are pointed in the same direction

 - SBV, MV, Advance/Decline Oscillator, RSI and McClellan Oscillator are Bullish
 - MACD and Stochastics are bearish

Overall, more points are in the favor of the further recovery.

End of the Market Crash?

Isn't it a good day? Read my Friday's (Stock Market Crash Analysis) post. Yes I expected strong run, but this rally up exceeded all my expectations - DJI run 11% up, S&P rally 11.5% up and the Nasdaq 100 has made 12,5% profit. S&P 500 and DJI have recovered from more than the half of the last week losses and the Nasdaq 100 index almost made to the October 3, 2008 close.

I had bullish feeling and I was reworded. Yet, let's not forget the lessons of the past by following the golden rules: protect the profit and cut losses. Even I'm still in Bullish mood and even all my technical indicators point to the continuation of the recovery, it is a good strategy to have trailing stop set.

I do not post any chart today, as I mentioned all my technical analysis is bullish at this moment and I see the odds are on the side of the further up-move. The fact that the market ignored huge volume and oversold levels in the middle of the September tells me that there is a possibility of the indexes running to this level. Yet, before that the indexes has to run over the September 29th, 2008 bounce level.

I believe the main questions many traders are asking now is "Is this the end of recession?" My answer is "I do not know...". Yes, it could. During the recent crash a huge amount of money left the market. Friday and today we saw that the investors started to buy by pushing the price up. I would say we will see how the recovery develops. In majority situation after the strong bounce we may see the attempt of the market to retest the support levels and today 11% run up is not a complete victory on the recession. I will say that the recession is broken only when I see after the first recovery run a down move and then reversal which would beat the first recovery run highs.

Again, as a mentioned in my previous post if you are long-term investor and for you it is not very important where the indexes are in a month if over the long period (several years) you are in profit then you use each drop to buy. Friday October 10 was a nice day to buy in long term (see my previous post). Even if the indexes drop lover in a month, then you will make just another injection into your 401k and IRA accounts. If you wait when the indexes are back to the July 2007 highs and then start to invest into your pension funds I may guarantee that over the long term your pension will be broken.

Stock market Crash Analysis

Friday was a nice day. The sentiment become positive and it happened on the high volume. See the DOW Jones Industrials chart below.


As I always state, I associate the high volume during the price decline with panic selling and extremely high volume with extreme panic. We already had the huge volume surge in the middle of September 2008 (see my "DJI Chart" post) which marked the end of the crash (on my opinion) at that time. I still convinced that it would be the end of the crash or at least a very solid bounce before further slide. Yet, the market dropped further down by ignoring the highly oversold levels. Why? - I think only because of the bailout (see my "Wall Street" post). When you show a "candy" to a spoiled kid you have to give it to him otherwise the child will black mail you. That is exactly what happened, credits were frozen and the kid received what he wanted...

One more point into the the favor of protecting profit strategy. We had a strong bounce on September 19, 2008 (only one day), however the reaction on the high volumes in September was not as strong as I expected, yet strong enough to be in profitable position. This situation show importance of the protecting profit - those who did not a set trailing stop instead of winning trade could end with loss.

The same is now. We have second wave of the extremely high volume - huge amount of shares changed hands - somebody was buying from panic seller in huge amounts... That tells me that we have very good chances of the strong bounce up. This week high volume together with unprocessed volume surges we had in September can push the market significantly higher. The stock market is extremely heavily oversold. Now, we saw some light when the buyers were dominant on the market (Friday's afternoon) and based on what I see I think this could be a begining of strong movement.

Yes, I'm positive - my technical analysis shows that on Friday we hit some bottom. I'm not telling that this is the End of the stock market crash and now only bright days are ahead. What I want to say is that there is a high probability we will see up-move as the reaction on the high volume surge. Will this bounce grown into the long-term recovery is another question, which would be premature to discuss now. That is why if I have opened a long position I set a trailing stop to protect a profit.

For long-term investment (IRA, 401k) I may say only one - you bought last month on the decline and high volume and now you buy lower on the decline and high volume again. If the market in a month is lower and you see high volume you will buy again. If you are long-term investor you will be reworded. If you do not know what to buy then invest into the indexes - the weak companies are dropped from the indexes and on their place come stronger ones and you do not have to do a research to find out what companies are strong.

Stock Market Crashes and Bubbles

I'm for the free market, yet, it does not mean I'm against regulation. We live in free country and we have police, we have court, we have law, we have army... We need all of these in order to protect the freedom. The same is with stock market. We have free trading, yet this free trading has to be protected. That is why I vote for regulations.

The Wall Street was created to support economy and to help it grows. It looks like now it's opposite - the economy has to support the appetite of the Wall Street and when the economy fails to do so we have stock market crash. That is why we need regulations. The stock market is not as it was a century years ago, it's not even as it was 10 years ago. The volume traded on the US stock market more than doubled over the last 10 years. Did the economy become better??? Maybe... but I'm not sure it's twice better as it was a decade ago... So, what is the source of increased trading volume - my answer is speculators (which includes me as well). That is why I think this is a time for some increased regulations against speculators (against me). When the market becomes driven by speculators and not by economy then the Wall Street may destroy the economy - this is my opinion.

Right now, I'm talking not as a trader, because what I'm taking about is against the trader's nature. The greedy buying and especially panic selling has to be under the control of the regulations. Otherwise we will have bubbles (like internet bubble in 2000) followed by stock market crashes. Nobody talks about that, yet we had bubble again and now it was in the mortgage sector. Because the mortgages became tradable commodity the demands on them increased and when the economy was not able to support the Wall Street demands the mortgage bubble has collapsed...

We will not be able to avoid bubbles and crashes. This is the nature of the free stock market. By having bubbles and crashes the stock market self regulates itself by helping the economy to move in the right direction. However, the free market is very attractive to the speculators and that is why the regulations are needed, without them we will have even bigger bubbles and more extreme stock market crashes. Especially more extreme crashes, why, because a speculators make more and faster during the stock market crash (market is more volatile).

The economy has to be protected from the situations when speculators are selling short stocks (stocks they do not have) in huge numbers - this creates a demand on the bear market and may turn a healthy down-trend into the global disaster. How to do it - this why we have government and all the institutions including SEC. Yet, it looks like they do not work in this direction... From my side I may say that even simple rule may help. For instance "In situation when the DJI drops for more than 3% in a single session, none of the traders or funds managers should have more the $10M in short position within the next week. Those traders who has more than $10M in short position on the moment when the rule is triggered, has to cover extra within the next trading session." It's simple: the market is still free, the crash is still possible because if you own stocks and you want to sell in panic it you may sell it and you may sell as much as you have. Yet if you want to sell short in order to profit on crash your greedy selling abilities are limited and your short trading activity will not affect the market.

2000, 2008 Stock Market Crashes

It  took 2 years after the internet bubble until the stock market hit the bottom and start the recovery movement. During the 2000 year market crash the S&P 500 dropped by 50%. It took more than 4 years for the S&P 500 to recover and reach the same high levels.

It took only a year for the S&P 500 to crash down for 42% now and we still do not see the end... How long will it take to recover from this hole???