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Inraday Charts

The indexes (Nasdaq 100, S&P 500 and DJI) have come to their highs seen on October 18, 2010. We already started to see some resistance to the up-move. Money flow on 1-min chart is already negative and on the 5-min chart money flow is moving towards negative area. The morning trading went on quite strong bullish volume (see hourly volume charts for S&P 500, Nasdaq 100 and DJI) - this is another force that may stop the today's advance. The money flow on the 15- and 30-min chart remain to be positive. I would continue to monitor these charts to see if any changes in the indexes' sentiment occur.

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.

Support Level

Over the last two weeks in my "Technical Analysis" post on March 9, 2009 and "DJI Chart" post on March 1, 2009 I have pointed that the huge trading volume seen on the indexes would definitely lead to the strong reversal. Last Sunday I have even mentioned that whoever entered long position after February 27, 2009 (day when we started to see huge increase in the volume) could be a winner very soon. Now, we had a strong rally up and basically the results of my previous technical analysis are confirmed by that.

As you may see, the volume based technical analysis sometimes could be very easy and in some cases it could be very complicated. As a rule it is easier to analyze volume on the longer term-periods and it is easier to define support levels. On the longer term charts and at support levels volume surges are stronger and more noticeable. Yet, when it comes to the shorter term charts and defining resistance levels volume based technical analysis becomes more complicated: volume surges are not as clear in the resistance as they are in support, and with smaller timeframes you have to consult higher timeframes charts to see general market trend and analyze volume in accordance to it. The same principles should be applied not just to volume but to any technical indicators. The difference between volume and price based technical analysis is that the volume shows the market sentiment that is based on the money flow, while price indicators rather follow the event. Volume never lie, yet, traders do mistakes in analyzing it. I'm not stating that the volume is the best technical indicator. It is difficult and sometimes almost impossible to apply volume analysis to low trading stocks. That is why volume works best with indexes.

Now, after the strong rally it is logical to ask if the market will continue to recover. There is no doubt that over the last couple of sessions the market could be considered overbought at least in short-term. Yes, if we take a look at 1-year and higher timeframe charts we may see that the stock market is still heavily oversold (especially DJI sector, then S&P 500 sector while Nasdaq 100 companies are less oversold). However, when you go to the lower timeframes you start to see some indications of overbought market. From this I would assume that the market still has power and most likely will go higher, however, price does not move up all the time - it moves up by having corrections down time on time. Taking look at the smaller time-frame charts I may see that we could be looking forward if not for a correction then at least for slow down and flat market.

I think everybody now believe that March 6, 2009 has market very strong support level due to the volume output in period from January 20, 2009 until now. I do not think we will see index back at this levels very soon. It is too early to judge if this is the end of the recession - it is not something that should be done after four positive sessions. Yet, I think we could expect good market over the next couple of month.

Long-Term Analysis

Some of mine friends (not active traders) are asking what to do with their pension funds. So, I just summarized a few points that I think could be useful to everybody:

1. If you are going to retire tomorrow it is too late to invest - think about how to save what you have;
2. For the rest - do not be greedy, do not go into active trading, do not invest into options or any other speculative trading vehicle;
3. Do not trust banks and portfolio managers - if you trust them your money they will buy personal jets and at the end you will be broken and they will be on the personal luxury boughts fishing;
4. If you can invest into index derivatives (QQQQ, SPY, DIA...) or index tracking funds - index cannot file bankruptcy. If there is bad companies in the index they will be replaced by healthy companies;
5. During the recession (stock market crash) stay in cash - do not look to reinvest in something other;
6. When the stock market is back in the long-term up-trend you can move all the money from cash back in the market and start investing on regular basis using dollar cost averaging.

That is all - simple six points. The last two points could be confusing - you may ask "How should I know when to stay in cash and when to be in the market?". Again it is very simple - follow the money flow. Go in cash when you see that money flowing out of the market (investors are leaving the market) and start to invest when you see that investors are coming back in the market. For this purpose could be used volume based technical indicators applied to the indexes and exchanges. As an example I would refer to two charts I saw at

http://www.marketvolume.com/sbv/trading_longterm.asp




Based on the SBV Oscillator (volume based technical indicator) you supposed to have your pension funds in cash since December 2007. When you should be back in the market? - When you see SBV Oscillator is moving back after it crosses 20% line, it will indicate that investors going back into the market.

Keep in mind that with pension funds (long-term investment) it's usually one signal a year and you do not pay for service to see this indicator. You may sign up for free trial at www.marketvolume.com take a look at this indicator and then resign up for free trial again in 3-4 months.

Stock Market Crash 1929, 1987, 2000, 2008

• 2008 Stock Market Crash
• 2000 Stock Market Crash
• 1987 Stock Market Crash
• 1929 Stock Market Crash

The Stock Market Crash 2007-2008

Stock Market Crash Causes:

1. Corporate Corruption (as always, even it's not announced yet).
2. Overvalued Stocks  (as always, even it's not announced yet).
3. Mortgage crisis.
4. Over unregulated financial institutions (on my opinion).
5. Unregulated big speculators playing short (my opinion again - we have now much bigger number of speculators including hedge funds who may play short).

After the Crash:

1. Bailout of the financial institution????
2. ???
3. ???

The Stock Market Crash 2000-2002

Stock Market Crash Causes:

1. Corporate Corruption.
2. Overvalued Hi-tech Stocks.

After the Crash:

1. New Rules for Daytraders;
2. CEO and CFO Accountability;
3. Accounting Reforms.

The Stock Market Crash of 1987

Stock Market Crash Causes:

1. No Liquidity. During the crash, the markets were not able to handle the imbalance of sell orders;
2. Overvalued Stocks.

After the Crash:

1. Uniform Margin Requirements;
2. New Computer Systems. Stock exchanges changed to new computer systems that increase data management effectiveness, accuracy, efficiency, and productivity;
3. Circuit Breakers. The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.

The Stock Market Crash of 1929

Stock Market Crash Causes:

1. Overvalued Stocks.
2. Low Margin Requirements.
3. Interest Rate Hikes.
4. Poor Banking Structures.

After the Crash:

1. The Securities and Exchange Commission (SEC) was established;.
2. The Glass-Stegall Act was passed to separated commercial and investment banking activities.
3.  In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

Charts Technical Analysis

Another, crazy week is behind. We saw strong slides and we saw strong recoveries. The feeling that the stock market is manipulated was following me the whole week - the indexes declined even when the majority of stocks were in advance - on one day we had a news on Government attempt to give a help to financial institution on the next day we hear that these institution do not need such help. How many else surprises wait for us?

Overall, despite all negative pressure, all negative news the Nasdaq 100 index slide down only 5 points (0.3%) over the week. Keep in mind that the Nasdaq 100 index is a basket of 100 non financial companies and as a result less affected by the financial sector than the S&P 500 index and DJI index. As a result of the week the DOW index lost 188 points (1.7%) and the S&P 500 index lost 23 points (1.9%).

The question is what will the next week bring to us? Will the financial companies be able to push the stock market deeper down despite the heavily oversold stage? We saw such attempts during this week, yet we saw that the rest non financial part of the stock market tried to move the market up (we witnessed a few attempts of strong recoveries).

Last week (see my previous "Stock Market Crash" post), based on the technical analysis of the 60-day chart I have made an assumption about a possibility of the strong recovery. Yet, the market is still down. Intraday market crashes, when the Nasdaq 100 index dropped for 3% (on Friday July 10), made traders to believe that the market was going to crush even more, and I think not a lot of traders accepted the same strong recovery later on the same day as a sign of the oversold market. I think that majority of traders still believe that the market will go further down and they do not dream even about a small recovery. Maybe they are right, maybe the stock market will be lower, yet I do not think that it’s going to be "tomorrow". As I mentioned before, I see the extremely high oversold levels and on my opinion we are on an edge of a strong recovery. Even if the market tends to be lower, before, I believe it has to release some oversold power in a recovery movement.

If we compare the October 2007 – January 2008 stock market crash, with current May - July 2008 down trend we will see different price behaviors. If during the Oct-Jan crash when the indexes dropped for 2% then in majority cases they continued to drop even further. However, during the current down trend very often we witness the scenario when the indexes dropped down for 2-3% and then they moved up in strong recovery within a single session (especially over the last two weeks). It tells me that the market is driven down by a few negative companies (like Fannie and Freddie) while the rest of the market tries to recover from the heavily oversold levels. That is why I have put a question above for how long the financial companies are able to push the stock market deeper down despite the heavily oversold stage.

In order to review my position about the current market, this week, I decided to take a look at yearly index charts to see the longer term tendency of the stock market.

Chart #1: Dow Jones Industrial Index (DJI) 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)



Chart #2: S&P 500 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)
 

Chart #2: Nasdaq 100 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)


Personally, looking at technical analysis of 1-year chart I would consider it risky to play short at this point of time.