S&P 500 Chart

Another mixed week. The S&P 500 and DJI indexes moved higher while the Nasdaq 100 moved in side-way trend in which this index has been since September 24, 2010 (right now only a few points higher). The S&P 500 an DJI indexes were mostly traded side-way (since September 24 as well) with exception of the strong rally on October 5, 2010. Currently, the Nasdaq 100 index moves at its high levels seen in April 2010. The S&P 500 and DJI indexes are still 2-3% below their April's highs.

Below I have posted daily chart (1 bar = 1 hour) of the S&P 500 index with plotted Nasdaq 100 index (orange line).

Chart #1: The S&P 500 daily chart with elements of technical analysis

The technical analysis on the chart above is applied to the S&P 500 index. The DJI daily chart would give quite similar picture. The Nasdaq 100 daily chart would be slightly different , with a little bit more bearish sentiment.

By summarizing the indicators above I may say that the longer-term positive divergence on the SBV and advance/decline oscillator is a good sign from the longer-term prospective. However, there are several negative signals at the current moment:

 - the SBV is still at high positive levels and is moving sideway. Even bullish volume accumulation could be considered quite strong and would indicate oversold index's condition, the Money Flow is still positive on the S&P 500 and DJI (not on the Nasdaq 100). Until we have positive money flow there are always will be good odds of up-move

 - Advance/decline volume and issues ratios and McClellan Oscillator are moving sideway after being at high levels. This suggests that if in September we had traders buying advancing stocks then, right now, there are not as many traders focused on the positive stocks as before. The number of traders focused on the declining stocks is about the same as the number of traders that are trading rising stocks. This shift from trading positive stocks suggest that many traders switch into bearish mood and if this tendency continue we may see more traders in bearish mood.

- We have a signal on the MVO. This suggests an increase in bullish volume (bullish volume surge). As a rule such increase in volume during price advance may lead to the shift in supply demand balance (when power of buyers become existed) with further reversal down. However, if you scroll the history you will see that usually reversal occurs when MVO returns to zero.

- The biggest concern on my view is an increase in volatility. The volatility is up since its low readings in the middle of September 2010. This is not normal. I have not see a lot of periods in the history when indexes moved up on rising volatility. The volatility is not too big to be considered strongly bearish, however the fact that is up from its low readings suggests nervous and uncertain trading, which is usually seen during down-moves.

Overall, I would say the the indexes could be considered predisposed to move down and we already may see some bearish signals. Which is logical when the indexes are at their Aprils highs. After a month of positive trading we may expect quite strong reversal. However, until wee see some negative money flow it could be too risky to play on it. If correction down meant to bee strong then there is no need to play at the top. More conservative approach would be wait for conformational signals and ply confirmed trend.

Money Flow

I mentioned a week ago in the "Advance/Decline" post on February 22, 2010 "... when you take a look at lower time-frames, you may notice that many indicators are overbought in short-term, by signalizing a possibility of some retracement, at least in a short-term. The stock market (majority of indexes) right now is in the range of its side-way trading where it was in period from November 10, 2009 until December 18, 2009 This is another factor that may suggest a possibility of staking in this range for a while...". In the past week we have seen exactly this scenario when the indexes (S&P 500, DJI and Nasdaq 100) stuck in side-way trading. One day we saw indexes dropping down and the next day the strong recovery moved them back to the November-December 2009 highs. Then, we had another day of strong decline followed by another strong recovery. At the end of the week the indexes are almost back at the November-December 2009 highs

Now, after a week of volatile trading, I think a correct question for technical analysis would be to ask if the longer-term indicators (that were bullish last week) are still bullish enough to push the indexes higher toward the next possible "pit-stop". Another question regarding shorter-term technical indicators would be to check if those ones that were overbought in short-term last week are still overbought.

From technical analysis prospective, by taking a look at the longer-term index charts (1- and 2-year S&P 500, Nasdaq 100 and DJI charts) I would say the same I said a week ago. The January's decline was pretty strong and during that decline we had very strong bearish volume surges and extremely negative advance/decline readings. If you check money flow (Chaikin Money Flow, Money Flow Index or SBV) during that decline you may see that the stock market was strongly oversold during that time and accumulated oversold power still has not been released completely. Because of that, I would continue assuming that the odds are still good for further recovery towards January, 2010 highs.

Taking a look at shorter time-frame charts, I would not say that the technical indicators are overbought as they were overbought a week ago. Majority of technical indicators on the 60-day chart are slightly bullish or neutral by suggesting possibility from flat to rising markets. However, you should remember that shorter-term outlook may change any time during a trading session on any day. Furthermore, I would recommend monitoring the shorter-term charts for changes in a sentiment during the trading hours.

Overall, I would say that results of my technical analysis are still Bullish and I see good odds of market moving higher. On the other hand, there is a possibility of volatile side-way trading in the same range the stock market is now. In November-December 2009 the indexes (NASDAQ 100, DJI and S&P 500) have been in side-way action for a month. Now, they have being moving side-way at the same levels for a week only. So, there are still some odds we may see further side-way move.

DJI

The purpose of technical analysis is to predict a possible future trend movement and, as a rule, predictions are based on the comparing the history and applying the history research results to the current market. This week I would like to show a few charts of Dow Jones Industrial (DJI) index. I selected 10-year and 6-month chart to demonstrate where the main indexes are at the current moment in relation to the longer-term periods.

From the 6-month DJI chart (see the first chart) you may see that the DOW index has been trading in narrow (2.5% wide) corridor for a month. I believe this side-way action has made many traders impatient to see when this pattern is broken and many of them, I think, expect to see strong correction, which would be logical after such strong recovery. However, I would not rush into short trade without setting a tight stop-loss strategy.

If you take a look on the second chart below (DJI 10-year chart), you will see that the DJI index is traded at the level which is inside of the historically defined long-term corridor. In 1999-2001 the DOW index spent 18 months in 8% corridor (between $10,000 and $10,800) and in 2004 we had 12 month of side-way trading in the same corridor.

Can we assume that we may expect to see the Dow index traded in the same 8% corridor for prolonged period of time now as well? What could be a reason that the Dow Jones index was in that 8% corridor for such long period of time? Maybe this is the level where the real value of the companies listed in the DJI index is: the Dow listed companies are not under-evaluated and they are not over-evaluated. If this is true then it would explain side-way trading before and we can expect side-way trading in the same corridor for longer period of time again.

Now, coming back to the 6-month DJI chart, we may see that the DJI index still did not hit the top of this 8% corridor. Because of that, the exit from the current 2.5% side-way trading still could be up toward the $10,800 level. This is why even when I see technical analysis results suggesting down move I would not play short without tight stop-loss.

Chart #1: The DJI Chart 6-month view of the current 2.5% side-way corridor
Chart #2: The DJI Chart 10-year view of the historically defined 8% side-way corridor

General Motors and Citi Group

General Motors (ticker: GM) and Citi Group (ticker: C) are about to be removed from the Dow Jones Industrials and S&P 500 indexes. Very nice news, and good decision - better later than never. Those companies with lousy management should be removed from the indexes a half of year ago. If it would be done in December 2008 when GM and Chrysler requested bailout money (what a scam...), I would assume the recovery would started much earlier. As I mentioned in my "Automakers Bailout - Good or Bad?" post in December 2008: "this bailout could become a waste of money", it is sad to accept, but it happened. I am still taking the same old position: "Old fat, spoiled, lazy dinosaurs has to die in order to free the way for young, strong, energetic wolves who will lead the pack... " - this what is recession is above - to clean the market and economy, so, it can develop further. If there is a demand on a product and a company producing it go bankruptcy then somebody will fill this place and will lead the economy. If there is no demand on a product then nothing and no bailout money will help.

S&P 500 Chart

Did not post any charts lately. In my previous "Simple Technical Analysis" post on April 12, 2009 and "S&P 500 Volatility" post on April 5, 2009 I have mentioned about possibility of the indexes stacking at the levels where the market spend a lot of time in side move. I called those levels sensitive levels. Below I have set 2 charts of the S&P 500 index: 60-day (1 bar = 1 hour) and 1 year (1 bar = 1 day) to show what I wanted to tell.

From the 60-day chart (see first chart at the top) you may see that almost whole April the indexes basically were in the side move. The Dow (^DJI) index was the first index that started to move side-way, then a week later S&P 500index followed this pattern and the Nasdaq 100 index, as always, still could be considered in the up move. From the second 1-year chart (chart at the bottom) you may see that theS&P 500 index stopped its recovery at the same levels where it was in a side move in period from the middle of January to the middle of February 2009. The DJI index stuck somewhat lower and the Nasdaq 100 run over those levels.

Those traders who are more than a year on the market has to know that in the majority situation the indexes are flat in the resistance and the support as a rule is sharp. It could be easily explained by simple fact that greedy buying usually spread over the time while panic selling is always sudden and sharp. Because of that I believe many of technical analysts are asking: "we were in strong recovery… now we are flat… What is the next? Reverse down?"

The answer on this question, I think, lies in the technical analysis of the longer-term trend. If according to the longer-term analysis we are not any more in the recession I would assume that the odds are still on the side of the recovery and we may see some decline after this side-way move and then resumption of the recovery. We already had similar situation from the middle of June 2003 until the end of August 2003, when after strong recovery stock market has been flat for 2 months and then it went back into up-trend for the next 7 months. As I repeatedly mentioned, the stock market cannot move up all the time. During the recovery (or up-trend), time on time, stock market has to release itself from shorter-term overbought conditions. This is exactly what we have right now on my opinion.

Index Analysis

Four weeks ago in my DJI post (on 11/23/2008) I have posted the following chart with statement that the market has set new support. I would like to point again to the same DJI chart:

After 10/10 support (October 10, 2008 support level) the stock market and indexes did moved flat for a month until November 5, 2008 when they started to decline again. Now, it is a months after 11/21 support (support on November 20-21, 2008) and the logical question could be "should we expect to see reversal soon since there is a possibility that the stock market has stepped back from it's November's extremely oversold levels and accumulated some Bullish volume in December?"

We had first strong volume surges with  setting a support level on September 18, 2008, second on October 10, 2008 and the third one (most recent) on November 21, 2008. Each of this volume surges during the index declined pushed the indexes into oversold condition and every  time market become oversold stronger and stronger. If on September 18, 2008 the market reacted on high volume by strong one-day rally up (about 10% in a single session), then after 10/10 bottom (market was stronger oversold) the reaction on high bearish volume was expressed by 1-month up and flat move with about 16% recovery. The last time, on November 21, 2008, when after high volume surges the stock market has become oversold even stronger then on 10/10, the market respectfully reacted stronger - we have one month up move and indexes (S&P 500, Nasdaq 100 and DJI) with 22-25% recovery.

The market is still could be considered strongly oversold because of the high Bearish volume on 9/18, 10/10 and 11/21, yet, I would weighted it as longer-term oversold condition. Over the shorter term we see some overbought levels - should not be a surprise with more than 20% up over a month - which may push indexes and whole market down, not necessary into another crash, yet on my opinion we may see an attempt to retest 11/21 bottom.

I would never try to guess what is going to happened to the market in several month or in a year - this is a job for fundamental analysts. What I do: I track if there is possibility of trend changes in the shorter term and then I monitor these changes for a possibility of developing them into stronger recovery or stronger crash. Right now, I see that indexes (S&P 500, DJI and Nasdaq 100) signal a possibility of the move down (keep in mind that I could be wrong, I'm just an average trader). The S&P 500 chart below explains my worries (Nasdaq 100 and DJI charts have similar look):

Last week, in my S&P 500 Analysis post I mentioned that red MVO (volume surge during the price decline) may push the S&P 500 index up (we had up-move this week). Now, my main concern is that green MVO (volume surge during the price advance) may push the indexes down. The rest of technical indicators, including Stochastics, RSI (Relative Strength Index), SBV, McClellan Oscillator are bearish on this chart as well.

DJI Chart

Despite my bullish last week outlook (see the "DJI" post on September 22nd, 2008) on the stock market we had the attempt to retest the September 18, 2008 lows. Yet, the market did not hit the bottom, in opposite the DJI (Dow Jones Industrials) recovered half of the weekly decline during the last two trading session. Sometimes I have feeling that it would be much better if they did not even announced the bailout than announced it and then started to play political games around it....

During the past week we had strong decline. Because of that I decided to take a look at longer 1-year chart to see if the results of my previous technical analysis are correct.


From the DOW(30) chart above we may see that the magnitude of the volume during the stock market crash is very big. I have already mentioned in my "DJI Volume" post about my understanding of such huge volume. For me it's indication of the strong panic selling that lead the stock market into strongly oversold stage. If you may try to question it on the 60-day chart by pointing that September 19th rally up has released this oversold power, the 1-year chart make me believe that we did not even see the begging of the market reaction on that huge sell off:

• The volume is still very high, which indicates we still have panic and uncertainty in the market. Yes, the last week daily volume is lower than the daily volume we saw in period from September 12 until September 19, yet it still far above the average daily volume over the past year.
  
  - The fact that the volume is down tells me that the moment of worst fear is over and there are not as many sellers as we had on September 17-18, 2008. Y
  
  - Yet, the fact that the volume is still high tells me that there are still a lot of sellers. However, as I always mention - if we see volume then somebody buying from these panic sellers and the fact that DJI is about 5% up from the September 18th low tells that the power of these buyers is bigger...
• The same with VIX (Volatility index) - it hit the top on September 18 and now it's down and moving flat. It does not move up any more which is good sign. VIX still at high level which indicates highly oversold market. We did not see the VIX moving down which confirms we did not have yet the recovery reaction on the oversold market.
• MVO is red. We do not see green MVO. That means that we had high volume surges during the price decline (panic selling) and we did not have yet high volume during the price advance (greedy buying).
• Low SBV indicates negative money flow. Yet it declines which suggest weak market, however very low levels suggest possibility of very strong recovery.
• MACD and Stochastics are in the recovery direction.

Overall, my 1-year technical analysis is bullish (in spite the last week 3-day decline) with exception of the SBV that could be considered bearish due its decline. I would still stay on my point highlighted in my last week post that I expect to see the recovery.

S&P 500

Over the past week in several my posts ("Support" in particular) I have concentrated my attention on the extremely high volume on the stock market. These high volume surges during the recent decline are seen clearly in all indexes including S&P 500, Nasdaq 100 and DJI. I compared some volume numbers in my "Oversold" post to the historical similar occurrences of high volume surges and pointed to usual stock-market reaction on such volume.

As I already mentioned, in all cases we always saw strong up-trend movement in response to the high volume. I always associate the high volume during the price decline as panic selling which leads market into oversold stage and the extremely high volume as extremely high panic selling which leads the stock market into extremely high oversold stage.

To better explain my view of the volume surge during the decline I set a few points. Yet, before coming to them you have to understand that volume does not show how many buyers or sellers we have, volume is 2-side transaction and for each sold share we have somebody who bought it.

1. Price declines and the volume is low: Price is declining because we have more sellers than buyers and there is not enough buyers on the market to satisfy the demands of these sellers and these sellers are willing to sell at cheaper price in order to find buyers.

2. Price declines and the volume is high (we have volume surge):The panic among sellers is growing as well as greed of the traders playing short and they are pushing the market stronger down. At some moment a group of traders (we may call them smart traders, institutional traders - I call them "Big Money Bags") make a decision to satisfy demands of all sellers by buying the huge amount of shares. At this moment we see high volume surge - a huge number of shares are changing hands.

3. Next: Those who wanted to sell - sold and have nothing to sell any more. Those who have bought, do not want to sell - they just bought and they are not in the losing position, even more, they are willing to buy more at this low price (that is why I call them "Big Money Bags"). So, the market starts to climb up under the buying pressure of the "Big Money Bags".

This is my understanding of the volume surge during the price decline. Why at some point "Big Money Bags" decide to satisfy demands of the panic sellers?, what kind of information do they have? - I do not care. All I know that if some traders with big bags of money decided to satisfy the sellers by buying at cheap price they will have enough money to push stocks higher to dump them at higher price to the greedy buyers later...You may accept my vision, you may decline it. Yet, it's difficult to argue with history. The main concept of technical analysis is to compare the current event to the history and find the possible future trend.

Chart #1: S&P 500


Chart #2: S&P 500
 

Summary of the charts:

July 2007 - Strong volume surge during the price decline with recovery after
November 2007 - Strong volume surge during the price decline with recovery after
January 2008 - Strong volume surge during the price decline with recovery after
March 2008 - Strong volume surge during the price decline with recovery after
July 2008 - Strong volume surge during the price decline with recovery after

September 2008 - Strong volume surge during the price decline ... what is next?

Panic Selling - Oversold Levels

Starting from the middle of July (see my DJI post on July 20, 2008) I have been accepting the high volume surges during the June-July 2008 market crass as extremely high panic selling that pushed the stock market into the heavily oversold stage. As a result of this heavy oversold level we had the recovery, yet, the recovery was not as strong as I expected. It's one and half month since the market hit the bottom and because of that I pushing myself to take another look at my longer term charts to see if there are any changes in the stock market sentiment.

By analyzing the S&P 500 and DJI indexes we may see a lot of similarities, yet, the Nasdaq 100 1-year chart has completely different picture.  No wonder that over the last month we had a lot of trading session when the Nasdaq 100 index was trying to push the market in one direction while the S&P 500 and Dow Jones Industrials were struggling to run in opposite direction.

The technical indicators on the Nasdaq 100 chart (see my set of indicators in the "New Highs/Lows" post on August 12, 2008) are not very optimistic at that point of time. Because of the last two weeks, the technical analysis of the Nasdaq 100 index gives the Bearish outlook. Taking into account that in July 2008 the Nasdaq 100 companies were not as oversold as the S&P 500 and DJI stocks it make the picture for the Nasdaq 100 even more Bearish.

At the same time the S&P 500 and DJI technical analysis still points to the higher odds of the Bullish market. In addition to the technical indicators, if I start to compare the January and March 2008 S&P 500 volume surges (panic selling) with July 2008 volume I clearly see that panic selling in July was far more extreme than in January which leads me to assume that in July the stock market reach stronger oversold levels than it was in the beginning of the year. As a result of the January and March oversold levels we had strong recovery where the S&P 500 run more than 10% up. Now, when I saw several times stronger oversold levels the S&P 500 recovered only around 7%... For me it's difficult to accept that this is over and overall, I still believe that the market has more room for recovery, and my longer term mood is still bullish. Yet, the further we go from the middle of July (bottom of the stock market crash) without recovery, the more often I will be looking at the longer term charts to see if there is any changes in the market sentiment.

New Highs/Lows

I missed my weekly post and I do it now. There were not a lot of changes in the sentiment on the market and my bullish technical indications described in my "Short-Term Technical Analysis" on August 5, 2008 post pushed all the indexes (including the Nasdaq 100, S&P and DJI) higher.

Now, looking on the past week you may see that short-term trading strategy based on the longer-term technical analysis could be successfully used if this technical analysis is correct (see my "Simple Trading Strategy" post).

Going back to my longer 1-year charts I do not see any changes in the bullish sentiment. So far, all indicators point to the good odds that we may see the stock market higher.



This time I have added New Highs/Lows Ratio - another breadth indicator that is used in technical analysis to confirm a trend as well as to spot reversal points. The New Highs/Lows Rule tells us that when we see increasing number of stocks that are making new 52-weeks highs (New Highs/Lows Ratio is increasing) we have confirmation of the up-trend and when we see that this number starts to decrease we should be worried about possible changes in the market sentiment and trend. So far, this indicator is bullish as well.

I think a trader should not be afraid to use several technical indicators. The more indicators are used the more informed trading decision could be made. Of course, with many indicators there could be situations when they all point in different directions and some traders could be confused and even desperate by this. I would say in this situation "Stop trading, take a few days vacation until you see a clear picture again". I consider professional traders those traders who knows when to trade and when to stay in cash and who can stay in cash long enough do not make a wrong step.

So, my longer term technical analysis shows me that the stock market still has room for further recovery. Yet, when you look at longer-term chart I would recommend comparing different indices - you may notice that the Nasdaq 100 index is not as oversold as S&P 500 and DJI indexes (see my previous post), on the other hand the Nasdaq 100 does not include financial companies...

Even if my longer-term charts point towards up-trend it does not mean that tomorrow we will see rising market. For tomorrow outlook, when I analyze 60-day chart I see that the indexes are oversold in short term. We already had first day of decline today and it would be nice before making any assumption on what I wrote to take a look at smaller time frames.