Swing in Trading

The last week of August was flat. The indexes already were in the side-way trend during the first two weeks of August - see the S&P 500 chart in the "S&P 500 Analysis" post on August 16, 2009. Then we had some up-move and again a week of side-way trading.

The indexes did not run far above the corridor I draw in the same post "S&P 500 Analysis" post. The Nasdaq 100 index is moving just above the upper level of the sideway corridor we saw in the beginning of August. The S&P 500 is about 20 points (2%) higher and the Dow Jones Industrial index is about 120 points (1.5% roughly).

It looks like the strong recovery we witnessed in period from August 18 until August 21, 2009 has become exhausted very fast. If by the end of the last week we had positive sentiment on the market (see my "Short Technical Analysis" post on August 23, 2009) then now I would not bet on it. I mentioned a week ago in the same post that if we have flat market we could be considering of a possibility of a stronger correction down as we did it during the first two weeks of August.

Especially what makes me worry is Friday’s trading – on August 28, 2009 we had strong positive opening and then similarly strong decline. If you have access to historical charts I would recommend you scrolling charts back in history for side-way moves and swings above all resistance levels and back down during those side way moves. I could have only one explanation of such move – there were stop-loss orders of Bearish traders just above resistance levels and because stop-loss orders are considered by the market as a demand to buy (to cover short position) the market did not hesitate to hit those levels and fill orders of other Bearish traders who was not in the position and wanted to sell at higher levels. Because the Friday’s strong opening was not supported by Bullish traders, the pressure of Bearish traders pushed the indexes back down. I hope my explanation is not very complicated, just take look at historical charts and check what usually occurs after such swings during a side-way market.

Coming back to the technical indicators on hourly S&P 500, DJI and Nasdaq 100 charts I traditional discuss in my weekly posts, I may say that by the end of the week:

• SBV is neutral – it is flat around central zero line;
•  Advance/Decline oscillator is positive – it advances after hitting low negative levels;
•  MACD is bullish – it moves up and just crossed zero line;
•  RSI and Stochastics are moving up which is positive sign, however they did not hit oversold levels. Furthermore, I would say that these indicators are only slightly bullish;
•  McClellan Oscillator is negative, however it shows some positive sign by starting to move up.

Overall technical analysis of the hourly index charts is positive, however I would not expect strong up-move and would monitor charts for changes in the sentiment.

Index Technical Analysis

Another week of almost flat market is behind. The Dow Jones Industrials is only 1.7% up from the previous week close, the Nasdaq 100 index gained 1.7% up as well and the S&P 500 index moved only 1.3% up from the previous week close. It would be wrong to say that this is a positive market; as well it would be incorrect to call this market Bearish. Starting from the April 2, 2009 the DJI index is in almost flat market (see my previous "S&P 500 Chart" report on April 25, 2009). The S&P 500 index did start to move side-way on April 9, 2009 - almost a month ago as well. The Nasdaq 100 index that was less affected by the recession (no financial stock in this index listing) was one of the most Bullish indexes, yet, still almost flat.

So what is going on the stock market from the technical analysis point of view? The stock market has been extremely oversold in all terms during the recent recession. In additions many of the stocks (companies), because of the crisis in the financial sector, were traded below its actual value (they were under evaluated). As a result we had strong recovery movement in period from February 9, 2009 until April 9, 2009. Any strong movement up leads the market into at least short-term oversold condition when the first wave of the investors who wanted to invest into underpriced stocks become exhausted and the second wave of the investors is not coming very fast to keep up-trend moving. For further healthy recovery the stock market needs to be released from these oversold conditions, attract more investors and that is why healthy bullish market supposes to have corrections.

We had one month of up-move and now we have one month of side-move. The same as last week I would say that I’m still in bullish mood, still I may consider possibility of some correctional movement down. Even if my technical analysis is correct and we see drop down, I would not expect it to be strong and prolonged in the time, but rather shallow and short lived.

There are several factors that make me believe in that:

1. Over the last month, by looking on the short-term index charts I may say that according to my short-term technical analysis the indexes very actively reacted on every (even small) volume surge to the index downside by immediate reversal up-move.
2. From the same short-term technical analysis I may say that there were number of occasion when bearish signals were ignored and price continued to move flat or up.
3. The stock market started to ignore negative news. Even we hear and see every day complains about swine flu and Chrysler bankruptcy and TV financial "gurus" are making statements that it negatively affects the market – we still have not seen any strong movement down.

This is one of the characteristic of the long-term bullish market when the majority of investors ignore bearish signals and negative news. In opposite every positive news and bullish signal attract investors to come back into the market and start to invest by buying.

S&P 500 Chart

Did not post any charts lately. In my previous "Simple Technical Analysis" post on April 12, 2009 and "S&P 500 Volatility" post on April 5, 2009 I have mentioned about possibility of the indexes stacking at the levels where the market spend a lot of time in side move. I called those levels sensitive levels. Below I have set 2 charts of the S&P 500 index: 60-day (1 bar = 1 hour) and 1 year (1 bar = 1 day) to show what I wanted to tell.

From the 60-day chart (see first chart at the top) you may see that almost whole April the indexes basically were in the side move. The Dow (^DJI) index was the first index that started to move side-way, then a week later S&P 500index followed this pattern and the Nasdaq 100 index, as always, still could be considered in the up move. From the second 1-year chart (chart at the bottom) you may see that theS&P 500 index stopped its recovery at the same levels where it was in a side move in period from the middle of January to the middle of February 2009. The DJI index stuck somewhat lower and the Nasdaq 100 run over those levels.

Those traders who are more than a year on the market has to know that in the majority situation the indexes are flat in the resistance and the support as a rule is sharp. It could be easily explained by simple fact that greedy buying usually spread over the time while panic selling is always sudden and sharp. Because of that I believe many of technical analysts are asking: "we were in strong recovery… now we are flat… What is the next? Reverse down?"

The answer on this question, I think, lies in the technical analysis of the longer-term trend. If according to the longer-term analysis we are not any more in the recession I would assume that the odds are still on the side of the recovery and we may see some decline after this side-way move and then resumption of the recovery. We already had similar situation from the middle of June 2003 until the end of August 2003, when after strong recovery stock market has been flat for 2 months and then it went back into up-trend for the next 7 months. As I repeatedly mentioned, the stock market cannot move up all the time. During the recovery (or up-trend), time on time, stock market has to release itself from shorter-term overbought conditions. This is exactly what we have right now on my opinion.