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.

S&P 500 Chart

Nice week - As I mentioned in my previous "Advance/Decline Signal" post on October 4, 2009 "there are some strong signals of a possible reversal and, personally, I would more closely watch charts over the next couple of days and I would consider that it could be too risky to be in a short position without tighter stop-loss at this time." those indicators that were bearish on February 2, 2009 became bullish on Monday February 5, 2009 and we had further recovery from the correction for the rest of the week.

Now, the main US indexes (S&P 500, Dow Jones Industrials and Nasdaq 100) are at September 17-23 high levels. Since index stuck for a week at these levels in September there is a possibility that we may see some sideway trading or a decline again. However, if we take a look at technical analysis of the same indicators we would see that only Advance/Decline Oscillator, McClellan Oscillator and MACD point to the Bearish sentiment and possibility of a decline. The rest of technical studies show shorter-term oversold stage, yet remain bullish or neutral by pointing higher odds of further up-move.

On mine opinion the most bullish signal for me is an absence of high volume during the recent up-move. We may see strong bearish volume surge on October 1-2, 2009 and this volume surge could be considered as a critical in the resent reversal. However, we have not been seen any highlighted trading activity (volume surge), which may shift supply /demand balance, during the recent up-move. Because of that I would say that there are good odds we may see indexes breaking September’s highs, yet as I mentioned before that we may see some sideway trading and even a decline before that.

Overall, I would say that my technical analysis of hourly charts (1 bar = 1 hour) does not have any leading indicators that would signal a possible downturn. However, I would not recommend rely on my words. What I would recommend is to check chart by yourself: what looks bullish today could become bearish tomorrow.

The S&P 500 Chart with elements of technical analysis.

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 - 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

S&P 500 Analysis Follow Up

A few days ago on Thursday May 14, 2009 in my "S&P 500" post I have mentioned about good odds of the indexes rallying back to the May 8, 2009 highs ("I use in my technical analysis are bullish and point to the good odds of the further recovery"). In the same post I expressed my hesitation about indexes breaking these highs. Now, the Dow Jones Industrials index came close to its May 8, 2009 high. The S&P 500 and Nasdaq 100 indexes are still  below.

We had a nice recovery today, yet, I am still staying on my position, expressed in my previous post, that I would not expect to have May 8 highs easily broken. Yes, my technical analysis (my technical indicators) is bullish at the current moment, yet, I would still consider that this is important to keep an eye more closely on the charts over the last couple of trading sessions.

Dow Jones Industrials

Another week is behind. Following my previous week "DOW Chart" post I may say that my worries abut further slide were confirmed. In that post I mentioned that the stock market is oversold and we may face a reversal soon, yet, I put a few condition that would be nice to meet before a reversal is confirm. One of this condition was McClellan Oscillator crossing zero line and the other one was presence of  negative MVO which would reveal the high volume surge (panic selling) during decline...

So, what do we have now? - We see that both of these conditions are met and we already saw some recovery. By taking a look at the same set of  technical studies I used a week ago I may say that technical analysis based on these indicators is Bullish. If a week ago the indicators show oversold market yet they were negative, then right now they still show oversold market but with Bullish sentiment which makes me believe that the odds are on the side of the recovery. The small exception is the S&P 500 index which is bullish but not as bullish as Nasdaq 100 and DJI indexes.


There are two positive factors for me that I would like to highlight.

a) The same as on October 9-13, 2008 and the same as on November 19-24, 2008 we saw high volume activity in the DJI sector on January 14-16, 2008. I always stated and I repeat myself - I associate high volume surge during decline as panic selling. Yet, because volume is always two side transaction and there is always a buyer for each seller, high volume during the decline tell us that the buyers started to satisfy demands of the panic sellers by buying from them in huge amounts and as a rule that leads to the shift in the supply/demand balance when those who wanted to sell already sold and do not push market down in panic any more.

b) Second positive factor is that in 2008 each time we had huge volume surge and reversal it was lower than the previous support level. This is the first time when we have huge volume activity which is above the previous support level. If we have a reversal now, this is going to be the first reversal which will set new support level that is higher than the previous support (support on November 21, 2008).

I usually do not give any advices, however, for long-term traders, for pension investors there is simple trading strategy which has only one rule: "Buy each time you see huge volume surge during price decline". As I mentioned in October 2008 (read my "Long-Term Investment" post) and as I stated in November 2008 (read my "DJI Analysis" post) I would say again - I consider it is good time to consider... Yet, if you believe that USA economy is going to crash further and never recover back, if you believe that this is only a beginning of the end (there is always a possibility) then you should stay away from any type of investment...

Again, I could be wrong and I'm not an investment advisor, so, do not trust me and do not trust anyone when you invest your money. Do not make any trading decision on what I told above - do your own home work.

Dow Chart

Last week (see my "S&P 500 Technical Analysis" post on January 4, 2009 ) I mentioned of a danger that could come from high volume expressed in high MVO in period from December 30, 2008 until January 2, 2009. At the same time I mentioned that I would expect to see a few flat session before the market may reverse. This exact scenario was played last week: Monday - Tuesday we saw almost flat market which pushed previously bullish technical indicators into bearish and neutral. If on Friday, January 2, 2009 my technical analysis was bullish, then by the end of the trading session on January 6, 2009 the same technical indicators on all three indexes I track (Nasdaq 100, DJI and S&P 500) were bearish (see chart below): SBV, MVO, Advance/Decline Oscillator and McClellan Oscillator - Bearish; MACD, Stochastics and RSI - from neutral to Bearish. As a result the rest of the week we had down market.

Now, at the end of the week my technical analysis still points me to the dominance of the bearish sentiment on the stock market: SBV is still moving down; Stochastics and RSI are still below 30 and 20 levels respectfully. Advance decline oscillator and McClellan oscillator are flat and may indicate the coming possibility of changes in the sentiment, yet, I would not bet on this until I see McClellan Oscillator crossing zero line and Advance/Decline Oscillator moving higher. It would be nice to see negative MVO (volume surge during the price decline) before reversal as well, yet, it's not necessary - we did not see red MVO before reversal on December 12, 2008 and December 29, 2008 and I may assume that we may see reversal without it again.

So, what is going to be next week? - I do not know - I am not an investment advisor and I do not want to be the one. Several years ago I pass the test and did have a mutual funds investment license. At that time I could be considered as an investment advisor. Yet, I left that business after I discovered that majority of investment advisors know nothing about stock market and investments and their main job is not to help people with investments but sell products of the financial institutions. After, I was put in the "shame corner" by my boss for selling to one client what he needed instead of what would give bigger commissions I decided that it's not for me. Now, I can give you only one advice - do not trust anyone in investment business, not even me. If you want to invest you will invest your own money and you have to learn by yourself what is good and what is bad.

Advance Decline

As a rule I do not make any posts during the week. Yet, today I witness interesting situation. S&P 500 advance decline oscillator and ratio were not as negative as it supposed to be during such index slide. The same was in the DOW sector.

Very nice volume in the middle of today’s trading session and very nice recovery right after that…

It was funny to read financial news today. Over the last few months the news tried to put in the head of investors the fact that the market moves down because of high oil prices. Today, when the oil was down and market was down – the media has found another explanation to the market slide and surprise – IT WAS NOT OIL. Maybe at the end the high oil price is not a reason of the market down move? Or maybe we should \never trust media and never based our trades on the media analysis of the stock market.

DJI Stock Listing

The DOW Index (Dow Jones Industrials or DJI) consists on 30 biggest public U.S, companies, 28 of which are traded on the New York Stock Exchange and 2 (Microsoft and Intel) on the NASDAQ Exchange.

The DJI index was lunched on May 26, 1896 and at that time it was a basket of 11 stocks. On October. 7, 1896 the Dow Jones Industrials index was increased to 20 stocks and in 1928 the DJI index was expended to 30 companies.

Below you may see the list of these 30 DJI Stocks as of April 30, 2008. This is an outdated listing, yet it may give you the picture of what companies are selected into DJI index. For most recent listing I would recommend visiting the Dow Jones web site

Ticker	Company	Sector	Exchange
MMM	3M Co.	Diversified Industrials	NYSE
AA	Alcoa Inc.	Aluminum	NYSE
AXP	American Express Co.	Consumer Finance	NYSE
AIG	American International Group Inc.	Full Line Insurance	NYSE
T	AT&T Inc.	Fixed Line Telecommunications	NYSE
BAC	Bank of America Corp.	Banks	NYSE
BA	Boeing Co.	Aerospace	NYSE
CAT	Caterpillar Inc.	Commercial Vehicles & Trucks	NYSE
CVX	Chevron Corp.	Integrated Oil & Gas	NYSE
C	Citigroup Inc.	Banks	NYSE
KO	Coca-Cola Co.	Soft Drinks	NYSE
DD	E.I. DuPont de Nemours & Co.	Commodity Chemicals	NYSE
XOM	Exxon Mobil Corp.	Integrated Oil & Gas	NYSE
GE	General Electric Co.	Diversified Industrials	NYSE
GM	General Motors Corp.	Automobiles	NYSE
HPQ	Hewlett-Packard Co.	Computer Hardware	NYSE
HD	Home Depot Inc.	Home Improvement Retailers	NYSE
INTC	Intel Corp.	Semiconductors	NASDAQ
IBM	International Business Machines Corp.	Computer Services	NYSE
JNJ	Johnson & Johnson	Pharmaceuticals	NYSE
JPM	JPMorgan Chase & Co.	Banks	NYSE
MCD	McDonald's Corp.	Restaurants & Bars	NYSE
MRK	Merck & Co. Inc.	Pharmaceuticals	NYSE
MSFT	Microsoft Corp.	Software	NASDAQ
PFE	Pfizer Inc.	Pharmaceuticals	NYSE
PG	Procter & Gamble Co.	Nondurable Household Products	NYSE
UTX	United Technologies Corp.	Aerospace	NYSE
VZ	Verizon Communications Inc.	Fixed Line Telecommunications	NYSE
WMT	Wal-Mart Stores Inc.	Broadline Retailers	NYSE
DIS	Walt Disney Co.	Broadcasting & Entertainment	NYSE