Dow Jones Transport

Another week of crazy market is behind. On Monday the S&P 500 broke January 23rd low just to recover about 5% by the end of the week. Very unexpected recovery for those who follow the news… All the media around the world is talking about recession, yet the market is where it was in the beginning of the February, 2008. If you take a look at 2-year chart you will see that the last 2 months the market moves flat. Yes, the range is big and is between the January 23 low and February 1, 2008 high (on some indexes it’s about 10%), however, basically, we are back where we were two months ago. In addition the DJI index still did not the brake the January 23rd low.

From 1-year chart you may see that the recession started in October 2007. (Does anyone remember when media started to talk about recession??? Where they were in October?)

If you take a look at DJT (Dow Jones Transport) index you will see that this index started the down move back in July 2007. It would be wrong to say that now the DJT index in the bear mood – this index more than 17% up since the January 22nd low!!!

The DJT went into the recession about 3 months earlier than the rest of the market… can we assume that the DJT may start to recover from the recession a few months earlier as well?

VIX

The past week has been extremely volatile. On Monday the S&P 500 index dropped almost 1.5%, on Tuesday it run up for about 3.5%, on Wednesday the S&P Index advanced for 1% at the opening only to drop later by 3%, on Thursday we had 2% rally up again and on Friday the S&P 500 declined for 3% with 1% recovery by the end of the session. Scary week…. If we take a look at the VIX (Volatility Index) we see that the VIX is around the highest levels we saw on January 22-23, 2008.

I believe many traders faced the situation when the technical analysis they used simply does not work. You open a position when it too late and right before the market reverses it’s trend and you cut losses again right before another reversal…

Welcome to the volatile market. I have already mentioned several times that when the market changes it’s direction very fast (volatile market) the intraday charts should be monitored more closely. That’s when the VIX index becomes handy. It would be wrong to assume that the same trading system (the same indicators setting) should work forever and in any market condition. Even if a trader has a successful trading system that has supported him/her over the past year and now it’s started to generate fake signals - it would be wrong to say that the system is bad. No! There is nothing wrong with the system, simply this trader did not pay attention to other indicators and did not do his homework. All he has to do is to adjust the trading system to the volatile market.

If you see that trading system you used over long period of time has started to generate signal too late then it means that you have to adjust the system instead of throwing it away. Maybe, you have to change the period setting of the indicators; maybe you have to change the signal trigger level… It does not mean that the changes you are making has to be constant - when you see that the stock market is back to the normal trend, when you do not see any more crazy swings and when VIX is down again (perfect indicator of volatile market) – I believe, it would be possible and logical to come back to the old system, to the old chart and indicators settings which supported you before.

One of the best trading strategies in the volatile market could be staying out of the market. Some traders may prefer to say in cash and do not trade at all when they see the high VIX levels. Yes, in volatile market you can may quick and good money, yet, at the same time you may lose everything very fast.

My point is that every trading system has to be monitored on a constant basis and has to be adjusted to the market condition. For the current market simple rule could be embedded into each system:

If I see VIX at high level then I should stop trading and using my technical indicators until the VIX is back below the level that is critical for my trading system

or

If I see VIX at high level then I should adjust my trading system and technical indicators and come back to the old system setting when VIX is back below the level that is critical for the system.

Coming back to the chat that I made a habit to have posted every week, I may say that the technical indicators on the S&P 500 index are not very optimistic. They point to the possibility of the further slide. Again, remember – we are in volatile market and sentiment could be changed very fast…

DJI

The Dow Jones Industrial Average Index (DJIA) is maintained and reviewed by editors of The Wall Street Journal. The first time the DJIA index was published on May 26, 1896 as a basket of twelve industrial stocks. The number of DJI stocks included into the index was increased to 20 in 1916 and to 30 stocks in 1928, as it remains by today.

The same as almost hundred years ago, the Dow Jones Industrial Average consists of 30 of the biggest public companies in the United States. Yet, the total number of public companies traded on the U.S. stock market is far above the number that was in 1928. Even the Dow index is one of the most watched and analyzed indexes over the world more and more analysts consider S&P 500 index as a better thermometer of the U.S. stock market.

Still, the simple fact that DJI index is one of the most analyzed indexes in the world places the DJI index into the position when the index movement may affect the stock market sentiment. Very often the bad news in the DJI sector may drug the whole U.S. market down and that is the main factor why many technical analysts still donate a lot of time to the DJI analysis in spite the fact that S&P 500 is considered better when it comes to describe the US stock market sentiment.

Beside the financial analysts who analyses U.S. economy and U.S. equities market, there are many financial advisors, institutional and retail traders who rely on the DJI technical analysis for the trading purposes connected directly with the Dow index investing.

One of the most popular DJI investing is trading DIA – very often called as DJI index tracking stock. The DIA is an Exchange trading Fund that track the performance of the Dow Jones Industrials Average index.

Another popular way to invest into the Dow index is the DJX options (Dow Jones Industrial Averages Index Options) which allow speculating on future Dow movements. Dow e-mini futures trading is another investing type that attract high risk speculators.

Even pension funds have found a way to invest into the Dow index trough index tracking funds. The Rydex funds are considered one of the most popular funds that allow investing IRA and 401k account into DIJ on margin (by using dynamic or double Dow funds) and trade Bear market (by using inverse DOW funds).

Of course, the direct trading of the stocks from the DJI index basked is considered as investing into the index as well and here the DJI index analysis could become handy as additional to the stock analysis.

S&P 500 MVO

Very nice day – I think it was very unexpected day for those who read and follow Yahoo and CNN news…

I may only say that following my S&P 500 post on March 4, 2008, the market confirmed one more time that High MVO has to be paid off. Maybe, March 4 was a little bit early to talk about that, the common rule is that the reversal occurs not at high MVO but when after hitting high positive or negative levels the MVO comes back to zero line. It could be very easy checked by scrolling back in history (lucky for us MarketVolume.com allows to scroll back in history).

Without posting a chart I may say that all indicators on the S&P 500, NASDAQ 100 and DJI indexes are positive and pointing up. I think it’s going to be very interesting week…

Technical Indicators

The last two sessions have moved the indexes close to the January 23, 2008 lows. Over the last week we may notice that the Nasdaq 100 was behind the S&P 500 and DJI in this rally down and as a result we have some difference in the technical indicators on the 60-day chart. The S&P 500 and DJI 60-day technical analysis are not optimistic. The majority of the indicators are still in the negative territory by pointing to the possibility of the further slide. The NASDAQ 100 60-day indicators are less negative but they point to the posibility of slide as well. Yet, as I always state the 60-day charts should be monitored in real time – what is negative today could become positive tomorrow within the first hour of trading.

S&P 500

In my last "Technical Analysis" post on March 2, 2008 I have mentioned about negative stock market sentiment on the 60-day chart and possibility of the further slide. Today we had some changes on this chart view, and I would like to go back to this chart again.



As we may see the majority of the technical indicators are turning from the oversold levels into recovery mode. From the chart above we may see that today

1. VIX index started to decline – the number of panic seller is redusing

2. RSI crossed the 30 line and is moving up

3. Stochastics is rising after running over 20 level by indicating the move out from the most recent lows

4. MACD is rising

5. A/D volume and issue oscillator is rising showing us the traders are more focusing on the advancing stocks.

6. SBV Oscillator is rising – that tell us about possibility of the changes in the supply/demand balance

There are still a few factors that may point to the further volatility, falt ar down market:

1. The SBV is still very low – it would be nice to see it moving higher.

2. The MVO is still low – it would be nice to see it equal to zero.

The most positive factor for me are the high volume surges and that at the end of the session recovery was on completely negative news - I have not seen so negative news in Yahoo finance and CNN money for a while…

As I mentioned several times, the recent drop was mainly caused by the high volume on February 26, 2008 in the S&P 500 and DJI sectors. We did not saw the similarly high volume in the Nasdaq 100 sector and as a result the recent drop was lead by the S&P and DJI mainly. Now, after 4-session drop, I think we could be going into the Bull market back. Let’s see what we have tomorrow…

Technical Analysis

My worries about the possibility of the down stock market, expressed in the previous Overbought - Oversold post was not without a reason. The big volume surge to the price move up on the S&P 500 in period from February 26 until February 27, 2008, clearly seen on the 60-day MVO (5,25,3), pushed the stock market lower.

The same as before, I would assume that the market would not go deep – I did not saw big volume surges in the same period on the DJI and NASDAQ 100 chart that would be similar to the S&P 500. Yet taking look at the 60-day S&P 500 chart (Nasdaq 100 and DJI chart looks similar) I may say the stock market sentiment is still very negative and we still may expect further slide or flat market. RSI is below 30, Stochastics is below 20, VIX (Volatility Index) is growing, SBV, MACD, Advance/Decline Volume and Issues Oscillators are in the declining trend – all of these indicate me that the stock market is in the Bear mood, yet it could be very close to the oversold stage. What is needed to become oversold is a high volume surge at the bottom. When I see the big negative MVO on the S&P 500 that could be similar to the one saw on February 7-8, 2008 then I may assume that the indexes are ready for up-move.

Keep in mind that I do not use the technical analysis based on the 60-day chart to analyze the mid-term trend. Yes, this timeframe could be considered big (covers 2 months period) and one bar on this chart equal one hour, yet, I consider that 60-day index technical analysis helps me predict trend for the next couple of sessions. The 60-day chart is still dynamic and the technical indicators may change its direction within a single session several. If you choose to use 60-day chart, then I may recommend monitoring them in real-time.

For a mid-term technical analysis I would consider analyzing higher timeframes where at least 1 bar = 1 day and which could be analyzed after the market closes. The examples of such timeframes could be 1.5- and 2-year chart.