DJI down, Nasdaq up

Indexes are quite volatile today - jumping up and down.

In opposite to yesterday, the DJI is pushing down while Nasdaq holds the ground.

Index Technical Analysis

As I mentioned a week ago in my "Increase in Volatility" post: "My expectation from the coming week are neutral. If we do not see strong decline on Monday, then I would expect to see side-way trading. Even if we see decline, I would expect the indexes to be above September 23's low in side-way action." - this is the exact scenario of what we saw over the last five trading sessions. The S&P 500 and DJI indexes are where they were last Friday (on September 24, 2010) and the Nasdaq 100 index slightly declined, yet, it is still above its low seen on September 23, 2010.

After a week of side-way trading, from technical analysis prospective, I would say, that many of technical indicators have generated bearish signals on Thursday September 30, 2010. However, side-way trading on Friday October 1, 2010 has pushed most of them back into neutral area.

Even most of technical indicators on the indexes hourly charts are in the neutral area, on the mid-term charts (1.5-year chart) we may see many bearish signals and bearish sentiment on these charts is quite strong. I consider that the market is strongly predisposed to have at least some correctional move down by the following reasons:

 - September was the positive month and there is no doubt for me that that market could be considered overbought (we had big positive volume/money accumulation over that period) which does not imply that the market will change its direction but which means the stock market is predisposed to change its direction;

 - After being down we see increase in volatility on the mid-term charts which means that the mid-term traders become nervous which means that when they may start dumping their stocks in order to fix their profit at the current highs - it may push indexes down;

 - Even on some shorter-term frames we may see positive signals, majority of technical indicators on mid-term charts are bearish and after a week of side-way action mid-term trader could become major players on the market;

 - On Thursday (on September 30) before the market opened, futures traders encouraged by good economic reports have pushed indexes strongly higher. However, after the bell (after the market opened), their positive sentiment was not supported by the rest of the market. In opposite, the indexes (Nasdaq 100, S&P 500,DJI, etc) have hit levels where stock traders started to sell and their selling pressure pushed the market stronger down. Such behavior of the stock traders, when they sell by ignoring positive news, I usually consider as a break down point when the market is on the edge to move down.

My bearish mood does not mean that the stock market must necessary go down. For many traders, the conservative trading strategy would be waiting when the indexes (S&P 500, Nasdaq 100 and DJI) break either their low seen on September 23rd or their high we saw on September 30th.

Nasdaq Health Care

I'll try to make short post this week. Last week in my "Technical Analysis" post on March 21, 2010 I have stated "Overall technical analysis became more bearish over the last week, mainly because of the Friday's decline. Many technical indicators started to show bearish signs. Yet, I would not disregard high volume during the Friday's decline. This volume may push indexes back to the most recent highs." - yes, we had push back, yet the market dropped down and the stock market (Nasdaq 100, S&P 500 and DJI indexes) is where it was two weeks ago (on March 17, 2010)

As I mentioned two weeks ago "I would prefer to stay in cash. On such overbought indexes I think it would be too risky to trade "Long" and 1% of gain over five day does not worth a risk. At the same time it could be a little bit early to open a short position." (see "High Volume and Volatility" post on March 14, 2010) I would continue to stay on the same note. It is better to stay in cash during uncertain market then risk for one percent move.

Yes, the volume and volatility suggest that the market is predisposed for a correction down, yet, I would wait for a conformational signals. Taking into account that we had another week of almost side-way trading I may say the the market became overbought even stronger. The longer we stay at top (possible resistance level) the more shares (bigger volume) are traded at high price and the more overbought market is. Actually, over the last week we had some increase in volatility as well which is a bearish sign. Should we see further increase in volatility it would increase (on my opinion) the odds of a correction.

Just a thought: we still have not seen reaction of the Wall Street on the Health Care Bill... Personally, I would try staying away from buying stocks of insurance and health care companies. If you have access toNasdaq Health Care index, check it - this index only 1 point below its highest historical level which was hit in 2008. Pretty strong rally for this index over the last 12 months. Do you think it will continue to go up???