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.

DJI

We had very nice move up this week. In spite of negative media pressure who threatened us that another 90 financial banks more likely will follow IndyMac path, the Dow Jones Industrial index is 6.2%, the S&P 500 and the Nasdaq 100 indexes are 3.5% up from the July 15, 2008 lows. Already on July 8, 2008 in my "Stock Market Crash" post I highlighted that the market is heavily oversold and we may face the strong and fast recovery movement. However, the market moved lover and on July 14, 2008 in my "Charts Technical Analysis" post I did take a look at 1-yer charts to confirm my expectation on the market recovery. I stated that the stock market is heavily oversold and that even if the market intends to drop further down, before, it need to release the oversold pressure in the recovery movement. I pointed that the Nasdaq 100 is not as oversold as the S&P 500 and DJI indexes and we saw the Nasdaq 100 behind the other indexes rally up.

I always mention about importance of the monitoring the charts during the trading hours. By looking back on the 60-day index charts we may see that on July 14, 2008 the Advance/Decline Oscillator started to advance by pointing to the shift in the market sentiment. On the same day the SBV oscillator started to advance indicating the possibility of the recovery. Shortly after the market open on July 16, 2008 the MVO become equal to zero and McClellan Oscillator overcrossed zero line by confirming the bullish sentiment. So, I do not think that those traders who follow charts are surprised by this recovery.

Now, looking forward, we have the same question - what's next? Will the DJI and the S&P 500 indexes follow the Nasdaq 100 drop on Friday or will the recent recovery continue? I would put this question in other way - did the recent recovery release the longer-term oversold power at least partially in order to resume the down-trend? and I would put other question - looking on the recent week, did the market become oversold in the shorter term?

To answer on the first question I have to look at my 1-year chart (the chart I mentioned in my "Stock Market Crash" post).



The technical analysis applied to the yearly charts tells me that the stock market is still heavily oversold:

1. SBV is still negative and still moves up;
2.  I see only red MVO (no green MVO - no volume surges to the price up-side);
3.  Stochastics only started to move up;
4. VIX volatility index only started to decline and still is above 20;
5. MACD is not even crossed zero line on its move up from the negative area.

All the technical indicators above point to the beginning of the development of the recovery and high possibility of further up-move. The 1-year chart definitely does not show any release of oversold power and it does not show that the market has become overbought during the recent week recovery. Based on this chart I would assume that we may see further move up.

To answer the second question I have to look at my 60-day index charts and see what my technical analysis tells me about shorter time-frame. Since the Dow Jones Index has made the strongest up-move I have emphasize my attention on that index.


From the chart above we may see that the 60-day DJI technical analysis overall is positive and points to the possibility of the further up-move:

•  the SBV is still very high - could be premature to talk about changes in the bullish sentiment;
•  the Stochastics and RSI are above 80 and 70 levels respectively by pointing to the bullish sentiment as well;
• VIX volatility index is moving down, away from its July 15, 2008 high when it run above 30.
• McClellan oscillator started to move down, yet, it is still far above zero line and it could be premature to talk abbot reversal based on this technical indicator.

The only negative fact I see on the DJI chart is high volume surges during the index run up on July 17-18, 2008 (see green MVO). There is a high possibility that this high volume pushed the indexes into short-term overbought territory and the fact that MACD and McClellan oscillator started to move down shows the possibility of the market reaction on that volume. The technical studies on the S&P 500 index chart looks almost the same as on the DJI chart, yet the 60-day Nasdaq 100 chart has less positive and more negative points.

Again, I would bring up 3 possible scenarios of the further development:

Scenario #1: Stock market reacts on July 17-18 high volume and drop down - in this case it can drop lower the July 15 lows.

Scenario #2: The stock market continues to move up by ignoring the July 17-18 high volume. The market is at high oversold levels and it has power to continue the rally.  That would tell me that this high volume was generated not by buyers but sellers who considered this small recovery as a good point to sell short. In this case I would tell that, most likely, those sellers pushed the market even into stronger oversold stage and we may see even stronger recovery.

Scenario #3: The July 17-18 high volume slows down the advance and the stock market continue to move up or sideway with further retesting of the most recent lows and collecting more downside volume before final reversal.

Personally, I would stuck with the scenario #3, simply because I already see some changes in the McClellan, MACD. In addition the Nasdaq 100 is not as oversold as the other indexes. Yet, I could be wrong and may only recommend to monitor and analyze charts.

Stock Market Crash?

My yesterday's and today's post look like exception from the rule. I do not usually make any comments in my blog during the week. Yet, I do it now because of the changes we see in the stock market and I need to put my thoughts in the correct order. Writing down a few points usually helps me with it and keeps away my emotion from my technical analysis.

In my "Nasdaq 100 is Behind" post on July 1, 2008 I described two possible scenarios on my opinion of the coming reversal. Over the past week we saw developing of the second scenario where the Nasdaq 100 pushed indexes lower. I mentioned that in any cases I would watch for high volume surges that may indicate the end of the downtrend and possibility of a reversal. Yesterday, in the "Advance Decline" post I have pointed on the interesting Advance/Decline behavior and high volume surges. I do not think that today's strong and sharp recovery should be a surprise.

I believe, the main question for me now is to consider if today's strong up-move is a beginning of the recovery or it is just volatile market before further slide...

By looking at my favorite 60-day charts (which I use to analyze 2-10 days trends), after today's rally I may say that all my technical indicators are bullish and point to the higher possibility of the further development of the recovery:
- SBV started to move up;
- I see big number of volume surges during the recent decline;
- McClellan Oscillator is on the up-side;
- Stochastics and RSI bullish as well;
- Advances and Declines points to up-trend;
- VIX Volatility index dropped down.

What I like is that all the indexes (Nasdaq 100, S&P 500 and DJI) show similar bullish sentiment on all technical indicators. Basically, my technical analysis points the higher odds of up-trend.

Yet, there is two things that makes me worry and which will press me to monitor charts more closely:
1. Today's rally was on the high volume which may push the stock market down again.
2. It's a rare situation when the market make a reversal from the down-trend without at least second attempt to hit the bottom.

Basically, I see 3 scenarios of the possible further development:

Scenario #1: Stock market reacts on today's volume and continue to decline. I would be very difficult for the market to do it due to the high oversold state. It's difficult to believe that today's advance relapsed all oversold power and hifted stock market into the oversold state. Personally, I would not expect to see that scenario, yet, there is always a possibility of me being wrong.

Scenario #2: The stock market continues to move up by ignoring the today's high volume during the advance. The market is at high oversold levels and it has power to continue the rally.

Scenario #3: The today's' volume slows down the advance and the stock market continue to move up and then side way with further drop and retesting of the most recent lows and collecting more volume before final reversal.

I believe the next few trading session will more reveal the intends of the market. It would be nice to see drop in the trading volume as a confirmation of the recovery.