Volatility

As I mentioned a week ago in my "Volatility, Volume and Economic News" post (on July 24, 2010): "results of my technical analysis suggest that the stock market ... is quite weak, unstable which and may reverse into another down turn" - we had volatile and overall negative week. Yes, the stock market (S&P 500, Nasdaq 100 and DJI indexes) only about 1% down from the previous week close, yet, we saw quite negative trading over the past five trading sessions.

There are three specific factors that should (on my opinion) be paid attention to. First one is an increase in Volume, second one is increase in volatility and the third one is that the indexes (see my "DJI Chart" post on July 4, 2010) are close to their previously seen resistance levels.

From one side an increase in volume during the decline on July 29, 2010 could cause the indexes to move up. The high volume is quite noticeable in the Nasdaq 100 and S&P 500 sectors. Taking look at this as well as at the fact that we saw change in the money flow on July 30, 2010 a technical analyst may assume that we may see  some up-move reaction on that "strong selling". From other side, not all indexes had strong bearish volume surges (surges during price decline) on that day. At the same time by going into the higher time-frames we may see that the volume increase is not as strong as it looks on intraday charts. Another factor is that even these bearish volume surges were noted during the price decline, actually, they occurred not far from the resistance seen on July 27, 2010.  From this prospective, I would say that my technical analysis suggest that we may see some up-move however I would not expect it to be very strong.

The volume leads us to the second factor - increase in volatility. We saw frequent changes in the trend over the past week (especially last two trading sessions). This is a bearish sign. It's not good to see increase in volatility close to the top. Very often it could mean that institutional traders (traders that invest huge amount of funds) are trying to sell at the top yet they cannot sell everything they have because they do not want to create selling pressure and they do not want to push stock market down before they dump what they want to dump.

Overall, I would say that you may find a number of technical indicators that suggest possibility of up move. My technical analysis tells me that this possibility exists as well, yet, so far, I do not see the indexes gonging higher their June 21st and July 27th highs. From the mid-term prospective, last five trading sessions could be considered as side-way trading with increase in volatility. At the same time longer-term charts indicate more bearish signals. Because of that I would expect to see some development of bearish trading and I would monitor charts more closely during the trading hours to see confirmation of that on intraday levels as well.

Volatility, Volume and Economic News

It looks like the summary I posted last week in my "Leading and Lagging Indicators" post (on July 18, 2010) was confirmed by positive trading week. In that post I stated "Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.". Already on Monday (July 19) some technical indicators started to generate bullish signals an already on Tuesday majority of them became Bullish.

Taking a look back at the past week I cannot say that this is that kind of up-move I expected. As a rule, an up-move is less volatile than down move, yet, past week's price advance is an exception. If you take a look at volatility indicators on daily chart (1 bar = 1 day) you will see that volatility went up. From technical analysis prospective, this is not good sign for bullish trend. Another negative sign (on my opinion) is that the past week's up-move was supported by increase in volume which was especially clear in the Nasdaq market. This is not like healthy up-move looks like. Even the stock market moved up as I expected last week, because of the volume and volatility, I do not believe in a strong recovery toward April’s highs.

Another point that makes me cautious is the reaction of stock market on the economic news and reports. I do not analyze economic reports and I do not base my trading decision on the economic reports. However, I monitor how stock market reacts on them. The last week has been enriched by good quarterly profit reports as well as by other economic news. The market did not react strongly positively on these reports, yet it did not miss smaller bad news. This would not be a characteristic of a healthy up-trend as well.

In summary, because of the increase in volatility and volume as well as because of the weak stock market reaction on positive economic reports, I would stay on alert about further up-move. Of course, if I see further advance which would be supported by decline in volatility and volume then I may change my opinion. Yet, so far, results of my technical analysis suggest that the stock market (Nasdaq 100, DJI and S&P 500 indexes) is quite weak, unstable which and may reverse into another down turn.

It does not mean that I am rushing into short position. The indexes are still on their up-side and there is a good possibility that we may see further advance. However, I would monitor charts closely for changes in the sentiment. When volatility is high changes could be fast.

Leading and Lagging Indicators

By following my "Index Trading" post on July 10, 2010 where I wrote "In summary I would say that I see number of factors that favor further up-move." we basically saw positive trading at the beginning of this week.

Then in my "Increase in Volume" post on July 13, 2010 I stated "At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week." and then in my "Nasdaq 100" post I mentioned "Yet taking into account increase in volume I may expect a slow down of the current recovery, and at leas a side-way trading - then we may see how it develops.". As it happened, we had 2 trading sessions of side way trading (July 14-15, 2010) and then strong decline on the last day of the week (July 16, 2010).

Now, the main question is whether the stock market (Nasdaq 100, S&P 500 and DJI) indexes will continue their drop, or there could be other scenario. Below, I tried to summaries some points that on my opinion may help in understanding possibilities of further trend development.

1. The Friday's drop down was very strong. The Dow Jones Industrials dropped on that day by 2.8%. The stronger DJI bearish trading last time was seen on June 29, 2010 and on June 4, 2010.
2. The indexes were only two trading sessions in side-way trading at the top before that decline (June 14-15).
3. During that decline we had very strong oversold advance/decline readings (in both issues and in volume)
4. During that decline we had strong output of the bearish volume (very high trading volume).

All four points above would recommend that this is could be logical healthy drop down to release some overbought pressure collected over the 8 positive trading sessions in a row on the Nasdaq 100 ( 7 positive sessions on DJI) and now, even we could have some further decline the odds could be good that we may see indexes back to their June 13-15 high levels.

The Bearish points are:

1. Majority technical indicators show bearish signals.
2. Volatility is increasing.

Leading indicators (volume and advance decline based technical studies) signal that the stock market (indexes) is predisposed to bounce up. However, most of the lagging technical studies (price based indicators) are bearish.  The high volatility is very important factor on my point. Because of high volatility we may see strong and sudden changes in a trend when most of the technical indicators (due to a lag) would generate signals when it's too late to open/close position. High volatility also suggest that the market is still weak and even if we see bounce up, if the volatility does not go down, there will be a possibility of developing of another down-move.

Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.

Nasdaq 100

This is seventh  positive session in a row on the Nasdaq 100 and DJI indexes. In addition today's daily volume even stronger then the yesterday's daily volume on some indexes.

Below you will find some statistics about 7 and more positive sessions on the Nasdaq 100 index:

Period	# of Positive Sessions	# of Advanced  Points	Were change in a trend witnessed after?
Jul 2, 2010 - Now	7	6.78	?
Feb 24 - Mar 12, 2010	13	6.79	NO
Nov 2 - 11, 2009	8	6.53	YES
Oct 5 - 14, 2009	8	5.30	YES
Jun 8 - 27, 2009	12	12.57	YES
The next one goes back to 2007

The numbers above do not imply that we may see a down-turn. Yet taking into account increase in volume I may expect a slow down of the current recovery, and at leas a side-way trading - then we may see how it develops.

Increase in Volume

I just wanted to mention that it could be worth checking the volume. Maybe an increase in daily volume is not big in the Nasdaq 100, S&P 500, DJI and NYSE Composite sectors, however some indexes (like Russell 2000 and S&P 400) show quite strong daily volume. This is summer time and current volume increase could be considered worth attention at this period of time.

I do not want to say that this is is a signal to sell. As I mentioned before in the "Index Trading" post on July 10, 2010, an uptrend does not usually ends suddenly - as a rule there is couple of trading sessions in the sideway action at the resistance level. Yet, if we see further increase in daily volume it may halt the current advance.

At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week. Still, the market likes surprises and it is already sixth positive session in a row in the Nasdaq 100 index In addition it is options expiration week So, an advice from my side could be only one - monitor charts on the daily basis.

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Index Trading

It look like my bullish points highlighted last week (see my "Technical Analysis" post on July 5, 2010) have been paid off. In that post I wrote "Taking into account that the DJI and many other indexes are at the bottom of the historically defined longer-term side-way corridor (see charts in my previous "DJI" post) I would assume that we may see a bounce up. At this moment, I would not try to guess whether it could be just a small bounce or a strong recovery toward April's highs." If on Tuesday July 6, 2010 there could be some skeptical thoughts about my bullish points, then, I think, the last three days of the strong rally up have confirmed that the indexes were oversold indeed and that historically defined long-term side-way corridor is still "in charge".

As I mentioned before, I will not try to guess how far the indexes (Nasdaq 100, S&P 500 and DJI) may go up. They may go all the way to the highs seen in April 2010, they may go to the resistance we had in the middle of June 2010 or they may advance just a few points up and then started to drop. I know, this may sounds a little bit annoying and some of the readers would expect rather to get straightforward answer. To those readers (traders) I may only say "I am sorry, I do not do it". I watch stock market (indexes and ETFs) on daily basis from 9:30 until 16:00 EST. For me, the stock market is an alive entity that is in the constant change. Today it strongly bullish and tomorrow it could be strongly bearish and the day after tomorrow it could be strongly bullish again.

So far, the majority technical indicators are bullish by suggest the good odds of the further recovery. I like that the volatility goes down, which mean more stable trading. I like the high volume at the beginning of the recovery on June 7, 2010, which I interpret as a buying action of institutional traders. I like that the market bounced from the bottom line of the longer-term side-way corridor (see charts in my "DJI" post). In addition we are in the beginning of the "Summer Vacations" period when we may expect low trading volume and more stable trading which is usually favors up-move. In summary I would say that I see number of factors that favor further up-move. Yet, I would still recommend monitoring charts for any the changes in the sentiment. As a rule up-move does not ends suddenly - in majority cases we may see couple of trading session of side-way move at resistance.

Technical Analysis

A week ago, on Monday June 28, 2008 in the "Nasdaq 100" post I have wrote "it is difficult for me to believe that the current side-way trading may grow into a recovery. Majority of technical indicators continue to remain bearish. The Nasdaq 100 is maybe the only index that shows some small oversold condition. The disturbing thing for me is quiet trading (no increase in volatility during the recent decline). It sounds like a 'silence before storm'." On the next trading day we had a strong continuation of the decline.

Now, when the indexes dropped about 15% from the April's top (16% on the Nasdaq 100 and S&P 500 and 14% on the DJI)  and about 9% in the last run down from the June 21st High (11% on the Nasdaq 100, 10% on the S&P 500 and 9 %  on the DJI) it could be a good time to look at the technical indicators to see what technical analysis suggests.

There are several points that I would like to focus on:

• The Nasdaq 100 index  had 10 negative trading sessions in a row;
• We had extremely low advance/decline sentiment readings on June 29, 2010;
• We had increase in daily volume during decline on June 29 and July 1, 2010;
• Starting from July 1st we ma see change in the money flow direction - it is negative, yet it moves toward positive area;
• Many technical indicators, including RSI, Stochastic, MACD and others, are showing positive divergence when the price makes new lows yet an indicator does not makes new low and in some cases even moves up.

By summarizing all of the above I could say that my technical analysis suggest the the stock market could be considered oversold on this stage (predisposed to the reversal). We had strong move down, we had oversold advance/decline readings, high volume on June 29 - July 1 suggests that panic selling hit many traders and number of sellers should be not as big as it was a week ago.

Taking into account that the DJI and many other indexes are at the bottom of the historically defined longer-term side-way corridor (see charts in my previous "DJI" post) I would assume that we may see a bounce up. At this moment, I would not try to guess whether it could be just a small bounce or a strong recovery toward April's highs. There are still a few factors that make me cautious: one is that the volatility is still high and second is that I would expect to see stronger increase in the volume after such deep drop.

DJI Chart

I have not been posting a chart for a while and mainly because of the current market position, I think it would be nice to take a look at the location of the indexes in relation to the previous support and resistance levels. On December 20, 2009 in my "DJI" post I already referred to the DJI (Dow Jones Industrial) longer-term charts. See below the DJI chart (chart #1) I posted at that time.

Chart #1: The DJI Chart 10-year view of the historically defined 8% side-way corridor

At that time when the up-trend was in the its full force, I alerted that the stock market is entering the sensitive area. Maybe I sounded funny when I expressed a possibility of side-way trading at the moment when the stock market up-move looked unstoppable, yet, I would like to show continuation of the same chart (see chart #2 below). I think, now you my try to analyze by yourself about a possibility of long-term side-way trading.

Chart #2: The DJI Chart 10-year view of the historically defined 8-10% side-way corridor

I do not want to state that the stock market will bounce up to to its April's highs - additional analysis on lower time-frame would be recommended for this. The DJI index has already been in this sensitive side-way corridor for about 8 months. It could be the end of the side-way trading or it could be in the middle. From the charts above you may only say that the current movement is more volatile than the side-way trading trading in 2004-2005, yet it less volatile than the side-way trading 1999-2001. Still if the indexes (DJI, S&P 500 and Nasdaq 100) bounce up - it will be the first bounce up only in this historically defined sensitive sideway corridor; and at this moment, my personal technical analysis confirms that such scenario is quite real.