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.

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

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 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."

Nasdaq 100

The indexes continue to move almost flat, with exception of the Nasdaq 100 index. It looks like the indexes are ready to go down, yet they wait until the Nasdaq 100 collect more overbought power.

The are two interesting thins happened today.

We had extremely strong volume surges in the Nasdaq Insurance and Nasdaq Internet market sectors. Keep in mind that this is sixth positive trading session in a row on the Nasdaq 100 index. These surges in the Nasdaq sector indexes would push the Nasdaq in stronger overbought condition.

Another point worth mentioning is very low volatility by the end of today's session on all indexes. I have already mentioned several days ago in the "Volatility Down" post (on September 9, 2010) that such drop in volatility is considered as "The Squeeze" and very often noted before sharp and strong swings. In addition, such low drop in volatility is very unusual in period of futures expiration - this Friday we have options expiration, futures expiration and index options expiration ("Triple Witching Week").

Volatile Markets

I mentioned a week ago in the "Trading strategy" post on August 8, 2010: "even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used.... If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears." - this is exactly what happened on August 1, 2010 - the lows were broken and the indexes continued to decline.

Now, majority of technical indicators are bearish and suggest good odds of further decline. Yet, as it always happens in case of technical analysis - there is always something that points in opposite direction.

In the current situation, on August 11, 2010, the strong decline has generated great bearish volume surge. In addition, on that day we had extremely low advance/decline volume and issues readings. If we compare August 11 to July 16, we will see that even smaller bearish volume has pushed indexes up. Furthermore, there is still a possibility that this volume may cause up-move. At the same time, from the bears prospective of view we may say that volume and advance decline signals on August 11 were too close to the recent highs to consider them as strong bullish signals. Another point is that even we had extremely low (extremely oversold) advance/decline reading in the S&P 500 and DJI sectors, the NYSE composite advance/decline volume was not even strongly oversold - yes, it was bearish but not strongly.

Overall, I would say that the odds of the further decline are higher. However, taking into account volume surges and low advance/decline reading on August 11, the one who is in short may consider setting a stop loss to protect a profit already earned since the time when August 6’s lows were broken.

Another aspect that should be considered (on my opinion) is that the volatility level is still high, which means that we may see sudden and strong reversal, therefore it could be recommended to monitor charts daily.

P.S. It does not looks like we have quite summer vacation trading...

Volatility

As I mentioned a week ago in my "Volatility, Volume and Economic News" post (on July 24, 2010): "results of my technical analysis suggest that the stock market ... is quite weak, unstable which and may reverse into another down turn" - we had volatile and overall negative week. Yes, the stock market (S&P 500, Nasdaq 100 and DJI indexes) only about 1% down from the previous week close, yet, we saw quite negative trading over the past five trading sessions.

There are three specific factors that should (on my opinion) be paid attention to. First one is an increase in Volume, second one is increase in volatility and the third one is that the indexes (see my "DJI Chart" post on July 4, 2010) are close to their previously seen resistance levels.

From one side an increase in volume during the decline on July 29, 2010 could cause the indexes to move up. The high volume is quite noticeable in the Nasdaq 100 and S&P 500 sectors. Taking look at this as well as at the fact that we saw change in the money flow on July 30, 2010 a technical analyst may assume that we may see  some up-move reaction on that "strong selling". From other side, not all indexes had strong bearish volume surges (surges during price decline) on that day. At the same time by going into the higher time-frames we may see that the volume increase is not as strong as it looks on intraday charts. Another factor is that even these bearish volume surges were noted during the price decline, actually, they occurred not far from the resistance seen on July 27, 2010.  From this prospective, I would say that my technical analysis suggest that we may see some up-move however I would not expect it to be very strong.

The volume leads us to the second factor - increase in volatility. We saw frequent changes in the trend over the past week (especially last two trading sessions). This is a bearish sign. It's not good to see increase in volatility close to the top. Very often it could mean that institutional traders (traders that invest huge amount of funds) are trying to sell at the top yet they cannot sell everything they have because they do not want to create selling pressure and they do not want to push stock market down before they dump what they want to dump.

Overall, I would say that you may find a number of technical indicators that suggest possibility of up move. My technical analysis tells me that this possibility exists as well, yet, so far, I do not see the indexes gonging higher their June 21st and July 27th highs. From the mid-term prospective, last five trading sessions could be considered as side-way trading with increase in volatility. At the same time longer-term charts indicate more bearish signals. Because of that I would expect to see some development of bearish trading and I would monitor charts more closely during the trading hours to see confirmation of that on intraday levels as well.

Volatility, Volume and Economic News

It looks like the summary I posted last week in my "Leading and Lagging Indicators" post (on July 18, 2010) was confirmed by positive trading week. In that post I stated "Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.". Already on Monday (July 19) some technical indicators started to generate bullish signals an already on Tuesday majority of them became Bullish.

Taking a look back at the past week I cannot say that this is that kind of up-move I expected. As a rule, an up-move is less volatile than down move, yet, past week's price advance is an exception. If you take a look at volatility indicators on daily chart (1 bar = 1 day) you will see that volatility went up. From technical analysis prospective, this is not good sign for bullish trend. Another negative sign (on my opinion) is that the past week's up-move was supported by increase in volume which was especially clear in the Nasdaq market. This is not like healthy up-move looks like. Even the stock market moved up as I expected last week, because of the volume and volatility, I do not believe in a strong recovery toward April’s highs.

Another point that makes me cautious is the reaction of stock market on the economic news and reports. I do not analyze economic reports and I do not base my trading decision on the economic reports. However, I monitor how stock market reacts on them. The last week has been enriched by good quarterly profit reports as well as by other economic news. The market did not react strongly positively on these reports, yet it did not miss smaller bad news. This would not be a characteristic of a healthy up-trend as well.

In summary, because of the increase in volatility and volume as well as because of the weak stock market reaction on positive economic reports, I would stay on alert about further up-move. Of course, if I see further advance which would be supported by decline in volatility and volume then I may change my opinion. Yet, so far, results of my technical analysis suggest that the stock market (Nasdaq 100, DJI and S&P 500 indexes) is quite weak, unstable which and may reverse into another down turn.

It does not mean that I am rushing into short position. The indexes are still on their up-side and there is a good possibility that we may see further advance. However, I would monitor charts closely for changes in the sentiment. When volatility is high changes could be fast.

Leading and Lagging Indicators

By following my "Index Trading" post on July 10, 2010 where I wrote "In summary I would say that I see number of factors that favor further up-move." we basically saw positive trading at the beginning of this week.

Then in my "Increase in Volume" post on July 13, 2010 I stated "At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week." and then in my "Nasdaq 100" post I mentioned "Yet taking into account increase in volume I may expect a slow down of the current recovery, and at leas a side-way trading - then we may see how it develops.". As it happened, we had 2 trading sessions of side way trading (July 14-15, 2010) and then strong decline on the last day of the week (July 16, 2010).

Now, the main question is whether the stock market (Nasdaq 100, S&P 500 and DJI) indexes will continue their drop, or there could be other scenario. Below, I tried to summaries some points that on my opinion may help in understanding possibilities of further trend development.

1. The Friday's drop down was very strong. The Dow Jones Industrials dropped on that day by 2.8%. The stronger DJI bearish trading last time was seen on June 29, 2010 and on June 4, 2010.
2. The indexes were only two trading sessions in side-way trading at the top before that decline (June 14-15).
3. During that decline we had very strong oversold advance/decline readings (in both issues and in volume)
4. During that decline we had strong output of the bearish volume (very high trading volume).

All four points above would recommend that this is could be logical healthy drop down to release some overbought pressure collected over the 8 positive trading sessions in a row on the Nasdaq 100 ( 7 positive sessions on DJI) and now, even we could have some further decline the odds could be good that we may see indexes back to their June 13-15 high levels.

The Bearish points are:

1. Majority technical indicators show bearish signals.
2. Volatility is increasing.

Leading indicators (volume and advance decline based technical studies) signal that the stock market (indexes) is predisposed to bounce up. However, most of the lagging technical studies (price based indicators) are bearish.  The high volatility is very important factor on my point. Because of high volatility we may see strong and sudden changes in a trend when most of the technical indicators (due to a lag) would generate signals when it's too late to open/close position. High volatility also suggest that the market is still weak and even if we see bounce up, if the volatility does not go down, there will be a possibility of developing of another down-move.

Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.

Increase in Volume

I just wanted to mention that it could be worth checking the volume. Maybe an increase in daily volume is not big in the Nasdaq 100, S&P 500, DJI and NYSE Composite sectors, however some indexes (like Russell 2000 and S&P 400) show quite strong daily volume. This is summer time and current volume increase could be considered worth attention at this period of time.

I do not want to say that this is is a signal to sell. As I mentioned before in the "Index Trading" post on July 10, 2010, an uptrend does not usually ends suddenly - as a rule there is couple of trading sessions in the sideway action at the resistance level. Yet, if we see further increase in daily volume it may halt the current advance.

At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week. Still, the market likes surprises and it is already sixth positive session in a row in the Nasdaq 100 index In addition it is options expiration week So, an advice from my side could be only one - monitor charts on the daily basis.

Technical Analysis

A week ago, on Monday June 28, 2008 in the "Nasdaq 100" post I have wrote "it is difficult for me to believe that the current side-way trading may grow into a recovery. Majority of technical indicators continue to remain bearish. The Nasdaq 100 is maybe the only index that shows some small oversold condition. The disturbing thing for me is quiet trading (no increase in volatility during the recent decline). It sounds like a 'silence before storm'." On the next trading day we had a strong continuation of the decline.

Now, when the indexes dropped about 15% from the April's top (16% on the Nasdaq 100 and S&P 500 and 14% on the DJI)  and about 9% in the last run down from the June 21st High (11% on the Nasdaq 100, 10% on the S&P 500 and 9 %  on the DJI) it could be a good time to look at the technical indicators to see what technical analysis suggests.

There are several points that I would like to focus on:

• The Nasdaq 100 index  had 10 negative trading sessions in a row;
• We had extremely low advance/decline sentiment readings on June 29, 2010;
• We had increase in daily volume during decline on June 29 and July 1, 2010;
• Starting from July 1st we ma see change in the money flow direction - it is negative, yet it moves toward positive area;
• Many technical indicators, including RSI, Stochastic, MACD and others, are showing positive divergence when the price makes new lows yet an indicator does not makes new low and in some cases even moves up.

By summarizing all of the above I could say that my technical analysis suggest the the stock market could be considered oversold on this stage (predisposed to the reversal). We had strong move down, we had oversold advance/decline readings, high volume on June 29 - July 1 suggests that panic selling hit many traders and number of sellers should be not as big as it was a week ago.

Taking into account that the DJI and many other indexes are at the bottom of the historically defined longer-term side-way corridor (see charts in my previous "DJI" post) I would assume that we may see a bounce up. At this moment, I would not try to guess whether it could be just a small bounce or a strong recovery toward April's highs. There are still a few factors that make me cautious: one is that the volatility is still high and second is that I would expect to see stronger increase in the volume after such deep drop.

Another Crash

As I mentioned in my previous post (see "Short Technical Analysis" post on May 31, 2010) "If we do not see up-side reaction on that volume tomorrow or the day after tomorrow then I would consider a possibility of retesting the Lows seen on May 25, 2010."  - we had side-way volatile trading at the beginning of the past week with strong decline on Friday, June 4 of 2010.

The Friday's decline wiped out almost all gain of the past two weeks. Now we are getting close to the May 25th bottom.

As with majority of the strong declines, the indexes (Nasdaq 100, NYSE Composite, DJI, S&P 500, etc) have generated strongly oversold signal: strong increase in volume during decline (volume surges) and extremely low Breadth (advance/decline) indicators readings. From one side these oversold signals indicate panic selling and possibility of shift in supply and demand balance which could lead to a bounce up.

From other side, we had too many similar signals (7 by my count) over the past month. In majority cases we had bounce up after such signals, however, all of them were short lived and the indexes are still at the bottom. Another negative factor is the high volatility level. We do not see a decline in volatility which tells that the stock market continues to be very sensitive and we may see any time other strong declines.

It is difficult to believe that we are going to face another stock market crash or strong recession. I would rather say that in period from March 2009 until April 2010 the stock market went too far and too fast (it was driven by institutional speculators and not by economy). The economy does not develop so fast and now it could be a time to level it up.

Short Technical Analysis

Overall, the past week was positive on the market (see my "Volume and Money Flow" post on May 23rd, 2010). The only negative thing was the strong negative opening on Monday, May 24 of 2010. The first fifteen minutes of trading on that day were extremely bearish. Basically, because of these 15 minutes of bearish trading, the indexes (Nasdaq 100, S&P 500, DJI and other are only modestly higher than the previous week close on May 21, 2010.

This week I'm not as bullish as I was last week. Yes, taking a look at the longer term chart, the odds are good that we may see a recovery to the higher levels. However, on shorter-term charts we may see some bearish signs

What exactly makes me worry is that the volatility remains at high level and that many technical indicators (Money Flow indicators, Breadth Indicators, Stochastics, RSI, etc) on the hourly chart have turned into bearish.

Another thing that makes me worry is that during intraday trading at the end of the session on May 26, 2010 we had strong bearish volume surge. For short-term frame this volume was quite strong, however we did not see strong up-side reaction on that bearish volume. Only one day (on May 27, 2010) we had bullish trading. If we do not see up-side reaction on that volume tomorrow or the day after tomorrow then I would consider a possibility of retesting the Lows seen on May 25, 2010.

Volume and Money Flow

The indexes did not bounce up (as I expected) after extremely lowadvance/decline readings seen on May 14, 2010. Last week I listed bad and good things, on my opinion, and if we compare the previous week decline with the recent week decline we may say that the difference is that the decline on May 20, 2010 was supported by big bearish volume surges. High volume surges during such decline are a very good sign to support extremely low advance decline reading.

Overall, there are several very strong signals as I see:

1. Extremely low NYSE Composite and S&P 500 advance decline readings on May 20, 2010 would suggest strongly oversold condition and possibility of up-move.

2. High volume on May 20-21, 2010 suggests that many investors started to buy attracted by low priced stocks.

3. On May 21, 2010 we may see change in the money flow toward bullish side.

4. McClellan Oscillator became positive which suggests that majority investors are focused on the advancing stocks.

5. The biggest positive signal for me is price's behavior on May 21, 2010. The indexes (Nasdaq 100, S&P 500, DJI and others) started session strongly down, during the first five minutes of trading they generated huge trading volumes and then on low volume the price went up. That tells me that the market went down to kill stop-loss orders and then when all stop-losses orders were eaten the price went up because of luck of bearish traders.

There is only one thing that on my opinion is not very nice - is a big number of low advance /decline reading over the short period of time. This is not a very good sign. Even if I am right and we will see a recovery, I would be very cautious and I would watch that recovery closely.

Advance Decline Analysis

Overall, we had quite a positive week with the exception of the last trading session on Friday May 14, 2010 when indexes declined strongly: S&P 500 - 1.85%, Nasdaq 100 - 1.97%, DJI - 1.49%, NYSE Composite - 2.15%, etc.

The good news is that it was not 3% or stronger (as we had before) decline and biggest part of trading session on Friday was in side-way range. The bad news is that it still was a strong decline and it pushed volatility trend up again.

Let's take a look at the Friday's decline from the prospective of my technical analysis and what I would expect to see. I emphasize on my and I because it is my personal opinion and my personal analysis which may not necessary goes along with analysis of other "professional" traders, investors and or advisors. I always recommend (before relaying on anyone's analysis or recommendations) checking the charts and doing some analysis by yourself and only then you can create your own opinion which may be based on the analysis results of others or may not. But it will be your opinion and at the end you will be investing your money.

Below I tried to summaries negative and positive aspects of Friday's decline and how it possibly may affect future trend.

• Advances and Declines: We had extremely low NYSE Composite and S&P 500 Advance/Decline reading as a rule such low readings suggest strongly oversold condition and in most cases we may see strong bounce up after this. This is a good sign and we may see bounce up and recovery to the April’s high levels and even higher.
  
  The bad thing about it is that this is fifth occurrence of such low advance/decline readings over past one-month period: on 4/16/2010, on 4/27/2010, on 5/4/2010, on 5/7/2010 and on Friday 5/14/2010.
  
  After April 16, 2010 we had 5-session up-move; after 4/27/2010 2 days of strong recovery; after 5/4/2010 no bounce up and after 5/7/2010 we had 3 days of strong up move. Now after 5/14/2010 low advance/decline readings I would expect to see bounce up as well. Yet, the bad thing is that we witnessed too many such low advance/decline readings within short period of time. Usually it happens at the bottom of down-trends or before begging of a long-term downtrend. Such frequent occurrence of low advance/decline readings in many cases is considered as a pre-signal of possible radical changes in the longer-term trend.
  
  I do not want to scary anyone that we are on the edge of new stock market crash. As I mentioned above, it could be played both ways. Personally, I would expect to see the indexes moving up to the April's highs and even higher, however, if this is not the case then I would be very cautious about longer-term trend.
• Volatility: Volatility on daily charts (1 bar = 1 day) continue to remain at high level. Volatility is not moving up which is good, however it does not decline which is not good (it moves sideway). I already mentioned several times in my previous posts that I would like to see a decline in volatility and only then I would be more bullish.
• Volume: Friday's decline did not generate strong bearish volume surges. From one side the indexes do not need strong bearish volume surges to move higher, because we already had very strong bearish volume surges during the decline on May 6-7, 2010. From other site it still would be nice to have some bearish money flow accumulated during that decline.
• Other Technical Indicators: Other technical studies (Stochastics, RSI, MACD, etc) are mostly bearish by suggesting possibility of further slide. However, I would count on the fact that majority of them are lagging indicators (signal changes in a trend after it happen) and taking into account current high volatility level we may see sudden and strong change in a trend and the sentiment could be changed very fast from currently bearish into bullish.

Overall, at this moment I base my technical analysis on the advance/decline data. Because of the low advance decline readings we had on Friday May 14, 2010 I would expect to see the indexes higher than where they are now. Yes, we still may see some decline, yet, on my opinion market has to bounce up. Then, depending on how strong and volatile the bounce is, I would build my further technical analysis.

Volatility still Up

As expected, we had a strong bounce up from the oversold levels.

I will be short:

Today's rally up is logical reaction on high volume surges during May 6-7, 2010 decline.

The good news is that today's trading session daily volume on all indexes (NYSE Composite, Nasdaq Composite, S&P 500, DJI, etc) is lower than the daily volume we had on May 6-7, 2010. We may see changes in the money flow toward positive readings. Many technical indicators became bullish suggesting a possibility of further recovery.

Not very nice news is that the volatility remains on high level and still is raising. Today's advance was quite strong - we have not see such strong daily gain since 2008th stock market crash. Because of that, Even I consider that the odds on the side of up-move, I would be very cautious and I would not be strongly bullish until I see some decline in volatility.

Oversold?

When the market goes down it triggers stop-losses set by traders. The job of a broker is to close a position when stop-loss order is triggered. A broker does not have to close a trader's position at stop-loss price - a position should be closed at any available price. Still, under usual circumstances if a stop is hit a position is closed at stop-price. However, if a big number of stop-loss orders are hit in a short time span and brokers have to close position of many traders and sell billions of shares and there are no enough buyers for these shares than those shares crash down until they are price low enough to attract buyers to buy them. That is how market may suddenly crash and that what most likely happened on Thursday May 6, 2010.

Now from technical analysis prospective we have strongly oversold volume and advance/decline signals. You may see very strong bearish volume surges in all market sectors: in NYSE, S&P 500, Nasdaq 100, DJI, etc. Actually, NYSE Composite trading volume on May 6, 2010 is the highest daily volume since October 10, 2008. At the same time you may see strongly oversold advance/decline readings on the NYSE Composite and S&P 500 indexes on May 6-7, 2010.

There is no doubt that the market has become strongly oversold during the recent crash down. There is enough oversold power to push indexes strongly higher and I would expect to see this move. However, majority technical indicators remain bearish indicating bearish mood among traders. In this case it could be good idea to wait at least for a few signals that would confirm a reversal. Personally I would be looking for decrease in volatility and change in the direction of the money flow.

S&P 500 Chart

Below you may see the S&P 500 index chart as a follow-up illustration to my previous "Stock Market Crash" post. Blue bars on the chart represent volume of the S&P 500 index. Increase in volume is very clearly seen at the end of April 2010, as well as huge volume on May 6-7 during the crash. The chart is taken from www.marketvolume.com

Chart #1: The S&P 500 of stock market crash in May 2010

Market Crash

Very nice volume we had today during the crash. It does not matter what was the reason, "computer glitch" or Greece crisis, the market hit down eat, all stop-losses and when there were nothing more to eat it bounced strongly up. Such strong volume means that the institutional traders were buying from those who placed stop-loss orders. All this high volume mean that, now, most likely we have oversold condition when we may have luck of bearish traders to support further decline.

It was crazy day, It was almost impossible to buy (many orders bounced back canceled), still, I like it, because such huge volume surges are clear signals of possible reversal. We still may see some volatility and maybe some decline, yet, I would expect to see the indexes (DJI, Nasdaq 100, S&P 500 and other) moving up.

I'll try to post my view of a "computer glitch" during the week-end.