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As in response to may note in my last "Trading System" (on 5/18/2008) post that the market is overbought over the short term, on May 19, 2008 the stock market including the Nasdaq 100, DOW and S&P 500 indexes has dropped into correction. For me the cause of this drop is the high volume during the market up move in period from May 13 until May 16, 2008 (see high green MVO on the Nasdaq 100 and S&P 500 in that period). The question now is what are the odds of the developing this correction down into something bigger and what the technical analysis is telling about the possibility of the recovery.
Coming back to the 60-day chart I have stopped my choice on the S&P 500 chart. Basically, the technical indicators on the major three U.S. indices (DJI, Nasdaq 100 and S&P 500) look similar with the exception of the volume indicators at this point of time. I have selected the S&P 500 because it somewhat in the middle between the other two indices. While Nasdaq 100 shows the absence of the high volume during the price move down, as an opposite, the DJI index shows luck of the high volume during the price move up. From the volume analysis prospective the Nasdaq 100 still could be considered overbought while the DJI could be considered oversold over the short term. The S&P 500 in this prospective is in the middle by showing the high volume during the price rise as well as it shows the high volume during the price decline.
The same as volume indicators the other technical studies are mixed, by pointing to the oversold market (over short term) and possibility of a recovery, yet, they are still weak and I would look for more confirmation signals:
- The SBV is flat. Yes, it's big enough to indicate the oversold market, yet, it does not move up;
- The MVO on May 20-22, 2008 is actually a very good to indicate the possibility of a recovery, yet, it's not very impressive on the Nasdaq 100 index;
- The Advance Declines Issues Oscillator started to move down again. Even if it indicates high oversold levels on May 21st, I would not bet on a reversal until I see this oscillator moving up;
- MACD is moving up and this is positive for a possibility of a reversal;
- RSI and Stochastics are below 30 and 20 level respectively by indicating the oversold market, yet, it would be nice to see them above these levels moving up as confirmation of a coming recovery;
- The VIX (volatility index) is increasing by moving closer to 20 - not very nice;
- McClellan oscillator did advanced, yet, it started to move down again - I would prefer to see it crossing zero line on up move.
My view on the current market is that it should be watched very closely on the daily basis.....
