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.

S&P 500 Rally Up

We had another week of strong rally up. The stock market already show short-term overbought levels last week. Still, the S&P 500, DJI and Nasdaq 100 indexes rallied up without any correction serious short-term correction down… It is not healthy when market goes up for a long time without any correctional movement.

The Dow Jones Industrials just passed its November-December 2008 highs. The S&P 500 index ran over those levels without stopping and is a few points below its November 4, 2008 high. The Nasdaq 100 index, not loaded by financial and automotive companies, run over all these sensitive levels and the next line for this index goes through March 2008 Lows – March 2007 Lows – April 2006 Highs – January 2006 Highs.

Yes, if we take a look at longer-term charts (7-year chart, 5-year chart, 3-year and even 1-year chart), we may see that technical analysis on them is bullish. Majority of technical indicators on these longer term charts are positive and show development of the longer-term up-trend. However, if you take a look at shorter-term charts (60-day chart and lower) you may notice that the indexes on those charts are overbought and at least short-term correction would be very healthy for the stock market. One of the rules of technical analysis is: the longer market goes up without a correction the stronger correction could be.

During the last two week of rally up we saw increased volume activity which would indicate greedy buying. It looks like Investors were running into the market on the positive reports – numbers have exceeded the expectations that "were purposely lowered at the end of the last yea". When this wave of greedy investors becomes exhausted we may face a possibility of strong move down. As a rule greedy buying does not stop suddenly and market does not reverse down sharply (in opposite to reverse up from down-trend), but we may see sideway move first. Actually, over the last two trading sessions we may see some signs of that.

So, over the last week we run into several occurrences when price based technical indicators on hourly charts (60-day chart) already signalled a possibility of the down-move. Even Advance Decline Oscillator and McClellan Oscillator pointed to a possibility of the correction. Only SBV(20) on the 60-day chart remained positive by showing the positive money flow. Below you may see this week chart and how technical analysis looks by the end of the week.

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.

Technical Analysis - New Highs and New Lows

As I mentioned several times I believe that it is important to understand the nature of the technical studies in order to properly use them in technical analysis. Use of indicators without understanding the principles that move them may lead into situations when a trader starts to blame an indicator for fake signals.

New Highs & Lows indicators are from the group of Breadth indicators and they represent the number of all stocks reaching the new 52-week highs or lows. These indicators are applied to the indexes and exchanges only (to the basket of stocks) - they cannot be applied to an individual stock.

Initially the New High/Lows indicators were applied to the New York Stock Exchange (NYSE). Now many traders started to apply it to the S&P 500 index which is well known as one of the best indexes reflecting stock market sentiment.

So what does New Highs and New Lows show?

I would set 4 basic principles behind these indicators which summarize my understanding of the New Highs and New Lows based technical studies:

1. When we see that the number of new highs increases and the number of new lows decreases during the price advance we have to understand that the bullish sentiment is dominant on the market. Basically we see that the number of stocks making new highs (moving up) increases and it attract investors to play up. Every day we see more and more stocks involved into uptrend and there is a possibility that the index will continue to move up.
2.  When we see that the number of new highs declines and the number of new lows raises during the price drop we have to understand that the bearish sentiment is dominant on the market. Basically we see that the number of stocks making new lows (moving down) increases and it attract investors to play down and possibility of further crash is still high.
3.  When we see that the number of new highs started to decline and number of new lows started to raise while the index price is still moves up we may tell that some stock from the index basket started to drop after being overbought and this change in the sentiment may involve other stocks into declining movement which may lead the index into the recession.
4.  When we see that the number of new lows started to decline and number of new highs started to raise while the index price is still moves down we may tell that some stock from the index basket started to advance after being oversold and this change in the sentiment may involve other stocks into a recovery process which may lead the index and majority of stocks from this index into the new up-trend.

here are 2 popular technical indicators based on the New- Highs and New Lows numbers - New Highs/Lows Oscillator and New Highs/Lows Ratio:

New High/Lows Oscillator = New Highs - New Lows

New High/Lows Ratio = (New Highs - New Lows) / (New Highs + New Lows) * 100

By applying the principles discussed above to the oscillator and ration we may say that:

1. When then the New Highs/Lows Ratio or Oscillators moves along with a price moving average (price trend) it confirms the current trend.
2.  When we start to see the divergence between the New Highs/Lows Ratio or Oscillators and price moving average it could signal about coming trend reversal.

Comparison of the New Highs/Lows to the behavior of the price moving average helps to look beneath the surface and can often warn about coming trend reversals. Yet, investors should be very careful with applying New Highs and New Lows based technical indicators to the basket with the small number of stocks. Such indexes as Dow Jones Industrials (DJI - basket of 30 stocks), Dow Jones Utilities (DJU - basket of 15 stocks) and Dow Jones Transportation (DJT - basket of 20 stocks) may lead to confusion since in majority of the cases we may see only making New Highs (New Lows = 0) or only making New Lows (New Highs = 0) stocks. To simplify the analysis and help with analysis of the small basket indexes, the moving average could be applied to the New Highs/Lows based technical studies.

Another point is that an investor (trader) should understand that New Highs/Lows indicators are based on the daily data and it could be difficult to use them on the intraday level. It would be logical to use them on charts where 1 bar equal at least to 1 day - lower timeframes become less informative.

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.