ETFs Analysis

When it comes to the trading Exchange Traded Funds (ETFs) you have to understand that in most cases ETFs are derived products. They are usually designed / set to track performance of the indexes, groups of stocks or various commodities. As an example QQQ stock is developed to reflect the performance f the Nasdaq 100 index, the SPY stock is set to track the S&P 500 index, IWM tracks the Russell 2000 index, VXX tracks the VIX volatility index, GLD tracks the price of gold USO tracks the price of oil, an so on...

Because of the fact that ETFs are always tracking something they are often called as tracking stocks (they are called stock because these funds are traded exactly like stocks). Because of this tracking ability you have to understand the the price of an ETF is not always driven by the suply and demand in the ETF itself but rather by supply and demand in its benchmark index or benchmark commodity. Respectfully, it is always recommended to analyze benchmark index or commodity in junction with your ETF. So, if for example you trade SPY stock then it is essential to apply technical analysis to the S&P 500 index in the same way you do it with SPY. If you do not do it, then at some moment you may face a situation that despite all signal on SPY it moves in opposite to predicted simply because you did not know about opposite signals on the S&P 500 index.

Trading Signals

Overall, the sentiment cold be considered positive for tomorrow's trading session. The Nasdaq 100 has broke its January 22nd high which could be considered as a good confirmation of bullish sentiment. S&P 500, DJI and Russell 2000 are close to break their highs as well.

Another positive sign that would favor bulls on the current stage is that the last two trading sessions' up-move did not generate any strong volume surges and we did not see any high advance/decline readings on the NYSE Composite and S&P 500 indexes. Therefore, we may assume that there are no overbought signals despite strong rally up we had during the last two days.

Another bullish sign is the decline in volatility which is usually associated with confident and positive trading of the bulls.

What to Expect?

The past week was short (Thanksgiving week had three full trading sessions and one short trading session), yet, quite volatile. Actually, we may consider that since November 18, 2010, the DJI and S&P 500 are in side-way volatile action. The Nasdaq 100 index (mainly because of the swing at the morning on November 24) is only about half of the percent higher.

While the main indexes (S&P 500, Nasdaq 100, DJI and Russell 200) are topping sideway, there are some indexes that are in clearly defined down trend - as an example, see Dow Jones Utilities index that could be considered in down-trend since October 20, 2010 and S&P 500 Financial index that has been moving down since November 4, 2010. Overall, lately we had mostly negative and side-way sentiment.

Taking look at technical analysis from the mid- and long-term prospective we may not see a lot of positive signals. The money flow on daily charts (1 bar = 1 day) is moving down. It is not negative on the S&P 500, DJI and Nasdaq 100, yet, it is close to become negative. After September-October rally up, the indexes could be considered quite overbought. Yes, some traders may say that the correction we had during the second week of November could be enough to release the stock market from its overbought pressure, yet, it is difficult for me to believe in that by the following two reasons:

- Some indexes are still in decline.
and
- We did not have any strong volume volume surges during that correction (with exception on the Nasdaq 100). The correction down does not ends on low volume. In most cases corrections down and down-trends have strong volume surges at the bottom and we have not seen it yet.

Overall, I'm still bearish over mid-term. However, I numerously mentioned in periods of side-way trading that when there is a clearly defined upper and lower line of side-way corridor (as it is now on the S&P 500 and DJI) it is always a good trading strategy to set a stop-loss.

From the short-term prospective, technical analysis is not positive as well. The money flow on 1-min, 5-min, 15-min and 30-minutes charts is negative. It is neutral on hourly charts. I would expect to see negative trading session tomorrow. However, we should remember that volatility is at high levels and we may see strong swings in either direction. Personally, I plan monitoring 15-min and 30-min charts tomorrow.

Dollar Up - Stocks Down

As I mentioned yesterday, despite the fact that some technical indicators show bullish signals on intraday time-frame, sometimes it is useful to take a look at longer-term time-frames. Yesterday’s bullish signals were caused by the yesterday’s afternoon rally. Yet, when longer-term sentiment is bearish we may have strong swings down as we had today at the market open.

This is common misunderstanding when a trader asks to give him/her one chart setting that would work all the time. If you locked in one indicator, in one chart time frame, sooner or later you will get caught in the situation like today’s drop down and all your profits will be wiped out. You always have to look beyond time-frame you trade. This is what helped me yesterday to avoid playing long. Yes, I did not play this morning’s swing, so what – I did not lost and I had plenty of time at the morning to reanalyze the situation.

At the current moment the technical analysis is bearish on all time-frames. The Advance/decline on the S&P 500 and NYSE Composite indexes readings are extremely negative as well. The good news for Bears and bad news for Bulls is that the today’s decline, so far, have not generated any volume surges. Absence of increase in trading volume during decline suggests that current decline does not generated panic selling yet.

US Dollar index is up by breaking its high seen on November 16. As I numerously mentioned over the last month, stronger dollar supports correction down.

Short Trading Week

The past week could be characterized by strong decline during the first half of trading session on November 15, 2010 and by strong advance during the first 30 minutes after the the market opened on November 18, 2010. The rest of the time we had side-way trading. By the end of the trading on Friday, the indexes (Nasdaq 100, S&P 500 and DJI) were just a little bit below their Monday's opening levels.

As I already mentioned on Thursday (see "Advance/Decline" post on November 18, 2010), despite the strong advance on that day the longer-term charts (based on the daily bars) continue to indicate bearish sentiment. On the other hand intraday timeframes (with exception of hourly charts)  have some bullish signals. As an example, Money Flow on the 15- and 30-min charts points to the possibility of positive opening tomorrow. The index futures and emini index futures are already traded more than half percent up. If they stay on the same level overnight we may face strong swing up at the market open.

The coming week is not very reach on economic reports. The only thing that may push stock market into volatile trading is Minutes of FOMC meeting on Tuesday, November 23, 2010 around 2pm. In addition There is no trading on November 26 and there is a short trading session on November 27.

There is a lot of attention has been around US dollar over the last month. The S&P 500 index was highly correlated with US Dollar Index. Most likely we will continue to see this dependence. Yes, the Indexes show strongly overbought levels on the longer-term charts and many technical indicators, including money flow, suggest the good odds of stronger that we had correction. If the US Dollar continue to go up as it went up two week ago then most likely the indexes will decline deeper. Yet, if the FED manage to push US dollar lower, we may see indexes back to their high levels seen in the beginning of November.

Back to Advances and Declines

Today, during trading hours (see "High Advance/Decline Readings Post"), I have mentioned about extremely high advance decline readings on the S&P 500 and NYSE indexes. The indexes did not moved any more higher after that, yet they still had quite strong gain. The interesting thing is that even indexes had reported strong gain by the end of the day, the advance/decline readings were not any more strongly bullish at the market close. The advances topped declines on NYSE by a margin of 3 to 1 only. If during the trading session volume of advancing stocks in the S&P 500 sector was 40 times bigger than the volume of the declined stocks, then by the end of the day the ratio is 8 to 1 only.

Overall, we had today strong bullish trading only during the first hour after the opening Bell. The rest of the today's trading session the indexes were moving mostly side-way and even modestly declined. Because of this side-way action, many technical indicators on 5-min and 15-min charts suggest weak opening tomorrow. Some technical indicators on 30-min and hourly charts followed the morning up-move and turned bullish. Yet, the longer-term charts remain to be bearish.

High Advace/Decline Readings

As emini index futures suggested yesterday, the indexes are up. The US Dollar is down which could be the cause.

The indexes are up too strong. The current up-move is not very healthy by two reasons: it will bring the volatility up and advances and declines are hitting extremely high levels (known as overbought levels in technical analysis).

From
http://www.marketvolume.com/quotes/advance_decline_sentiment.asp
you may see:

For the S&P 500 advances beats declines by margin of 480 to 13. On the Nasdaq 100 advances beat declines by margin of 95 to 5.
Advance/Decline issues ratio on the S&P 500 hit 19 and advance/decline volume ration hit 40. See advance/decline sentiment at
http://www.marketvolume.com/quotes/advance_decline_sentiment.asp?s=SPX

I would not trade up - we may go down in the same way we are going up at such conditions.

Advances and Declines

Past week's decline has been supported by high bearish volume in the Nasdaq 100 sector. As a result today's session was under the Nasdaq 100 attempt to push the market higher while other indexes remained flat. US Dollar index was down today and it was another factor that hold the market form further decline.

We had strong decline yesterday during which advance/decline volume and advance/decline issues on the S&P 500 and NYSE composite indexes has hit very low readings. As a rule such readings in technical analysis are considered with oversold condition and panic selling and are usual noted at the bottom of a correction. However, current decline did not generated any noticeable bearish volume surges on the S&P 500, NYSE Composite and Russell 2000 indexes. Yes, we saw high volume on the Nasdaq 100, however, the Nasdaq 100 index is not volume leading stock market index. Because of these low advance/decline readings we may see some bounce up, yet, I'm skeptical that it could be end of correction.

From the money flow prospective, we may see positive money flow on 1-min time-frame, however, 5-min, 15-min, 30-min and hourly time-frames have negative or very close to negative money flow on the S&P 500, DJI and Nasdaq 100 indexes. From this point we may expect negative trading tomorrow at the market open. However, emini index futures are already traded now about half of percent up which, on other hand, suggests positive trading tomorrow at the open.

I would continue monitoring US Dollar index, as it looks like S&P 500 index continues to move in opposite to this index direction.

Money Flow and Volatility

We had up-swing at the market open and then decline as I expected yesterday. However, around 11am the indexes started advance as US Dollar started to decline. If you compare today's US Dollar Index and S&P 500 index you will see that their trends are exactly opposite. As I already mentioned several times, it looks like current stock market investors are looking at US Dollar trend.

Regarding money flow: the money flow continue to stay negative on the hourly charts. Today's advance did not greatly affected it. On 30- and 15-min charts it have became positive (I have mentioned yesterday that I would watch these charts). Yet, on 5-min chart money flow is becoming negative again.

Overall, from the money flow prospective I would say that the main sentiment(hourly chart) continue to be weak, in addition we may have decline tomorrow at the market open (5-min chart). If this happen and we see change in the flow on 15- and 30-min chart he we may have some strong decline.

Other things to consider is :

- The ETFs already dropped after the market close and index emini futures are already traded down. So most likely we will have weak opening tomorrow.

- The US Dollar index is close to its high seen on October 19 and on October 27, 2010.If this level is broken many traders may consider that the US dollar is not any more in down-trend. It could be additional fuel for stronger decline on the stock market.

- There are not a lot of economic reports, so most likely the trend will be guided mostly by technical analysis over the next couple of day (should not be surprises).

- Over the last couple of trading sessions we have an increase in volatility. I'll be reducing bar period setting on most of my intraday technical indicators to avoid a situation "when it's too late"

S&P 500 Index Chart

We had quite strong break through from the side-way trading on Thursday, November 4, 2010. The last two days of the week were accompanied by very strong bullish volume which very clearly could be seen on the Dow Jones Industrials (^DJI) and the S&P 500 (^SPX) indexes.

We had strong bullish volume surges on many indexes in period from October 12 until October 21, 2010. We have not see any reversal followed that strong bullish trading (I would not call a 2% retracement as a correction or reversal). Now, again, we have strong bullish trading...

At the current moment many technical indicators suggest good odds of further advance. This is mainly because of the advance during the last two trading sessions. However, I think that we should remember that the same technical indicators suggested a possibility of a correction just a week ago. I would not relay heavily on technical analysis right now. It looks like other factors (possibly fear of dollar inflation) move big player into the stock market, while other big players are dumping stocks.

We had strong move up and by many indicators (volume and advance/decline based) the stock market could be considered strongly overbought. The high trading volume surges over the last three weeks confirms that - there are many big traders who consider market overbought and who is dumping in big volumes to greedy  buyers. It is difficult to say who will win in this battle. Keep in mind that over the last two years there are big companies who reported big earning and who did not invested earned many in anything but was sitting on cash. Now, when the Government is officially talking about how much good an inflation could bring to the economy and FED announcement about printing and pumping another $900 billions, those companies could be buying. Of course there could be other explanation of the last two days up-move, however as technical analysts we should not worry for the cause, but watch where the money go.

Now, when the market is far up from the Augusts' lows, it would be logical to have strong correction. The question is when. Right now I would watch S&P 500 SBV Oscillator (bar period = 20) on daily chart (1 bar = 1 day). Starting from the beginning of September SBV Oscillator show positive money flow. The money flow is still positive on that chart. I would wait when I see decline in the flow. Yes, daily charts are longer-term charts and they have some lag in signals. However, if we face a correction I would expect it to be quite strong.

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

US Dollar ans S&P 500

As I mentioned a week ago in my "Strong Volume" post on October 16, 2010 "if market is predisposed to reverse its trend it does not mean it will happen tomorrow. It could happen tomorrow, yet, we still may see a week or even two weeks of side-way trading." - since October 13, 2010 the S&P 500, DJI, Russell 2000 and other indexes could be considered in the side-way action. The Nasdaq 100 index could be considered moving side-way since October 18, 2010.

As I commented over the past week, this side-way trading was supported by very strong increase in volume and was very volatile. It is not a common thing to see such huge trading volume at the top. As a rule, at the resistance levels volume surges are smaller and more prolonged in time, while at support levels volume surges are very strong. I have scrolled index charts over the past 10 years and I was not able to find any occurrence of such strong increase in daily volume on the S&P 500 and DJI history. Some similar, but smaller increase in volume was noted in period from April 14 until April 19, 2010 when the indexes were traded at the same high levels. My neighbor would say "There's some serious sh... is going on that market"

The critical point on mine view is that on last trading day of the week (Friday, October 22, 2010) volume was down to its normal level. The volatility was down as well. I would even say that volatility was very low, "like a silence before storm".  I have already mentioned on Friday (see "Low Trading Volume" post) that such decrease in volume and volatility could imply that the period of movements in investments positions of "Big Guys" could be over; which could mean that the next week could show who won (Bulls or Bears) and whether the market (S&P 500, DJI and Nasdaq 100 indexes) will be trending up or down. Conservative traders who does want to spend a lot of time on technical analysis could simply wait when either October 19th low or October 21st high is broken and then make a trading decision.

On the other hand I will not be surprised to see the market at the same level next week. The Election Day is coming and I do not think that some political leaders would like to see any type of crash or strong move down right now. In 2008 the stock market crashed too deep down. I was always under impression that the market was over-pushed down artificially by some "Big Players". This is why we had in 2009 very strong recovery in short period of time. In 2008 the stock market played on the hand of some party and it looks like now it is helping the same guys. But this is another story, I'm not a politician and I do not play conspiracy games - it may drag away from "cold-blooded' and unemotional analysis. Just in some cases, some weird market swings could be very difficult to explain from the prospective of technical analysis.

Coming back to the technical indicators I would say that

 - The daily charts remain to be bullish, yet I see strong overbought signals, especially on the volume based technical indicators. The volatility on daily charts is going up, which is usually  happened before Bear markets.

 - The hourly charts have mixed signals - some indicators and some indexes are bullish and other indicators and indexes are bearish. The common thing between all indexes on hourly charts is that all of them have overbought signals.

- 30- and 15-min charts could be considered slightly positive: you may see some positive Money Flow, however at the same time you may see negative divergence in the Money Flow.

 - Smaller time-frame, after Friday's quiet trading, is very neutral, yet, I would say that some indicators have tendency to become negative.

Note: by referring to volume and advance/decline based technical indicators I refer to MarketVolume charts. See NYSE, Nasdaq 100, S&P 500, DJI, Russell 2000...

It is worth mentioning that US Dollar index has generated number of oversold signals and many technical indicators on this index indicate bullish sentiment. If the US Dollar reverses and moves up it could be as trigger for the stock market to go down. At the current moment I focus some on mine attention on dollar simply because over the last three month the S&P 500 index trend is chronically opposite to the US Dollar index trend. It's like some invisible hand is trying to direct the stock market by using US Dollar.

Chart #1: The US Dollar and S&P 500 index daily chart with elements of technical analysis applied to the US Dollar index

S&P 500

I'll try to be short today. A few things:

- Hourly, 30-min and 15-min S&P 500, DJI and NASDAQ 100 charts have negative money flow - this is a bearish sign;

- 5-min chart has positive money flow which suggests that we may see some positive trading tomorrow. If this is the case, I would monitor 15- and 30-min charts for changes in the money flow on them;

- Volatility is growing and this is bearish sign;

- Trading volume is still high, yet we already may see decreasing tendency;

- Over the lat couple of months the S&P 500 index's trend is exactly opposite to the US Dollar index's trend and today's session was not an exception. There is a good increase in volume on US dollar index and I would say that this may indicate a possibility of Dollar going up. If this happens we may see the S&P 500 index decline.

It is already seven trading session as the S&P 500 is in side-way volatile action. Upper and lower lines of this side-way corridor are already defined. Conservative traders may simply wait when one of these lines is broken as a confirmation of either trend.

NYSE Advance/Decline Readings

The indexes are going to open modestly higher, which should be logical after yesterday's strong selling. There are some bullish signals in the 1-min and 5-min index charts, yet, the 15-min, 30-min and hourly charts remain bearish. I would continue monitor 5-min chart in parallel to the 15-min charts to see if during the morning up-move indicators on 15-min chart turn into bullish - it would indicate a possibility of stronger bounce up.

A few interesting points that I would consider worth attention.

- Yesterday we had strongly oversold (extremely low) advance/decline issues and advance/decline volume readings on the NYSE Composite and S&P 500 indexes. As a rule after that we may see bounce up.

- Volatility on the longer-term frames is rising which is bearish sign.

- We had 2-day up-move in US Dollar index. Up-move in dollar favors bears.

Strong Volume on all Indexes

As I mentioned on Friday before the market opened and in a few hours after the opening Bell, the last day of October's options was very volatile at the beginning, yet the volatility dropped down by the end of the session. The interesting part of Friday's trading was strong advance in the Nasdaq 100 index (2.1% up) at the moment when the rest of the indexes was trying to push down: DJI dropped 0.29%, Russell 2000 declined 0.23% and S&P 500 modestly advanced by 0.20%. At the same time, the indexes from the financial sector strongly declined on Friday: S&P 500 financial dropped by 1.71%, Nasdaq Banking by 1%. Housing and precious metal indexes were strongly negative on Friday as well: Amex Gold, PHLX Gold/Silver and PHLX Housing decline more than 1 %.

Friday's trading session was very interesting from the prospective of volume technical analysis as well. It was the third trading session in a row of high trading activity on all indexes and on some indexes the volume surges were very strong. However, since we hade mixed trends on Friday, we have mixed volume readings on different indexes. On the Nasdaq 100 index we had strong bullish volume surges on the S&P Financial and DJI indexes we had strongly bearish volume surges (especially if we look at them from the lower timeframes). From the longer-term prospective I would consider all volume traded over the last three trading session as Bullish volume, simply , because it was at the top of the recent up-trend. The only under a question for me could be the S&P 500 Financial index which has been in strong decline for the last two trading session.

Overall, I would say that the volume we saw over that last three trading session must affect longer-term trend. The question is when. We have all the factors that precede the reversal down - we had strong up move without even short-term corrections; we had huge bullish volume accumulation during this up move which indicate strongly overbought condition; we had strong increase in volume which could be considered as greedy buying by retail traders, etc. Still, as consistently mentioned before, if market is predisposed to reverse its trend it does not mean it will happen tomorrow. It could happen tomorrow, yet, we still may see a week or even two weeks of side-way trading. To be sure in reversal I would monitor money flow direction on the daily charts (1 bar = 1 day).

The third interesting point is that on Friday we had up move on the US Dollar index which was supported by extremely strong volume. If we take a look at the US Dollar reversal in December 2009 we may see that when US Dollar started to move up this up-move was accompanied by huge volume surges. If we see that US Dollar will continue to recover it could be another point that would support correction on the US stock market - if you compare US Dollar index to S&P 500 index you will see that over the last half of year, in most cases, the US dollar trend is opposite to the S&P 500 trend.

P.S. I'm sorry I did not post any chart snapshoot today - will try to do it tomorrow if I have time.

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.

New day - New data

New day - new data - new view on the market. In similar to September 30h way we had strong opening. Index futures traders have pushed the indexes up before the bell, yet, in opposite to September 30th way this time positive sentiment on futures market was supported by positive move on the stock market and indexes continued to move up.

As I mentioned above, new day brought new data that on my opinion attention should be paid to:

 - we had very strong volume during today's run up. The strongest increase was seen in the financial sectors (see Nasdaq Financial and S&P Financials). NYSE daily volume is the highest daily volume since July 16, 2010. Nice volume increase was seen in the S&P 500 and DJI sectors. However, the Nasdaq 100 index volume was not as high;

 - we had very extremely strong bullish advance/decline readings;

- we have further increase in volatility on daily charts;

- S&P 500 and DJI broke their high levels seen on September 30, yet the Nasdaq 100 index stayed below its high.

High volume means big players are in the game. The question is what they are doing - are they selling at high (indexes are at their 5-nmonth highs) to greedy buyers and to short players whose stop-losses were hit when indexes opened strongly up. Or they are buying at high because they have information that assures them that the market will go up without any correctional move down??? I do not think retail traders could be selling in such amounts. However, there could be other big players who decided to play short at high - in this case this is a battle between giants and we should see who wins when we see volume down.

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.

Index Trading

side-way trading on the S&P 500 and DJI indexes and eight straight in a row positive trading sessions on the Nasdaq 100 index - this is what we have by the end of the week. There is quite different picture on other indexes. As an example, the Dow Jones Utilities (^DJU) index is already in the correction down since September 9, 2010.

Overall, we have not seen negative moves on main market indexes over the past week. However, the same as I mentioned in my few previous posts, I would say that intensity is growing.

Some points to consider, which I think are important.

• The advance/decline issues and volume ratios are moving down on all three indexes (Nasdaq 100, DJI and S&P 500). On the DJI and S&P 500 indexes the advance/decline ratio is already negative. This indicator tells that the majority of stocks are already in decline. The indexes are not down because of the strong earnings reports and strong moves on some big companies (one company make 5% up and five companies make 1% down each - you have index flat).
•  We had big bullish volume surges on many indexes over the past couple of trading sessions. The strongest bullish volume surges were noted in the insurance and internet market sectors. Such surges indicate that big institutional traders make a decision to fix profit at the top and sell big number of shares to greedy retail investors. Personally, I would stay away from the investing into insurance companies, especially by knowing that the Government is putting hand on the health insurance which will take away some profit from the insurance companies.
•  Taking into account big bullish volume accumulation on many indexes over the past two weeks, the stock market could be considered overbought. The indexes (Nasdaq 100, S&P 500 and DJI) did not have any noticeable correction over the past two week.
•  We have negative divergence on many technical indicators - when the price moves up and make new highs yet an indicator does not make new highs. As a rule this suggests changes in the stock market sentiment.
•  All over the media you may hear positive news, like there are no negative news at all - this is a negative sign for me. I consider it like attempt to manipulate sentiment of small traders and make them buy while "big boys" (who invest big and who express opinion on news) are dumping.

Some positive signals

• Longer-term volatility is down - this is a positive sign.

In summary, I would say that that technical analysis suggests that the market is predisposed to move down. Some indexes and market sectors are already in decline, yet, main market indexes are still at the top. My opinion is that we may face bearish trend, yet I could be wrong. If the market is predisposed to move down it does not necessary mean it will go down - we still may see side-way trading. A conservative trading strategy could be waiting for confirmation signals before investing.

P.S. Some interesting quote from the news - something negative that is not strongly highlighted in the media: "Regulators on Friday shut down three Georgia banks and one each in New Jersey, Ohio and Wisconsin, boosting to 125 the number of U.S. bank failures this year … The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007."

Intensity is growing

Seven trading sessions in a row the Nasdaq 100 have been positive. The rest of the indexes are forth session in a row in the side-way move. Intensity is growing...

Advance/Decline ratios on the S&P 500 and DJI are already negative...

Trading Strategy

Last week in my "Side-Way Trading" post I mentioned about a possibility of short-term up move, yet, I was skeptical about strong up-move. It appeared to be that I was wrong. We did have a strong up-move. One more time the stock-market has proved that sooner or later everybody makes mistakes in analysis and stop-loss strategy should be used not just to cut losses but to protect profit as well.

During the last four positive sessions the indexes (Nasdaq 100, S&P 500, DJI, etc) have come close to their June's and Augusts' high levels. So far, the odds are good (from technical analysis prospective) we may see the indexes third time at those levels. Twice the stock market (indexes) has bounced down from these levels and most likely we may see slow down again.

Majority of technical indicators continue to be bullish and as I already mentioned, the technical analysis suggests that we may see the indexes moving higher. There are only two negative sings from my point of view.

First thing is high volatility level. The stock market continue to be highly volatile and this is a bearish sign. In such volatile market we could have strong down move in the same short period of time as we had the current 4-day up-run.

Second negative thing, from my point of view is that the market was not strongly oversold, yet it did make strong up-move in short period of time. It is more like some institutional investors came back from vacations, they saw stocks cheaper than a month ago and they started to buy. What is going to happen when their buying power became exhausted?

Because of these two points above, it is still difficult for me to believe in strong recovery (Yet, I could be wrong). Because of that I would not be playing long at this moment. At the same time there is no bearish signals and because of that I would not be playing short either.

One of the rules in my trading strategy is staying in cash until I see a pattern. I missed the last up-move - I did not lose money on that, I just did not make as much as I could. Still, the fact is that I missed this move and now it is better to stay in cash in order to avoid another mistake. My view on the current stock market condition is that I would expect to see indexes at their June's and Augusts' high levels. Then, depending on how those levels are hit (is they are hit) I would built further analysis.