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."

Greece with Media versus Volume and Technical Analysis

Very nice day. If you take a look at my Sunday's post (See "Volatility" post on may 2, 2010) and you will understand why I am in a good mood.

In my Sunday's post I wrote "Taking into account volatility, I would assume that the odds are on the side of the development of a correction down. Big bullish money flow since the end of February 2010 has pushed the stock market into overbought condition and it is in the favor of correction down." and it could look skeptical yesterday, yet, today it is completely another story.

It was interesting to watch financial news today. News always can find an "explanation" of event. If the market goes down the media states that investors are disappointed by FED keeping rates unchanged (if the rates stay unchanged it tells that the economy cannot afford higher rates). If the market goes up media states that investors are happy that FED keeps rates unchanged (low rates stimulate economy). There are always bad and there are always good news on the stock market. Media's job is to pick up news that fit the current market movement, which should not be very difficult, especially taking into account that it is done after the fact. In this way they always look smart and professional and they are "never wrong".

Today media blame Greece financial situation about stock market drop. Common, Greece has been all over the media over the last half of year and state that investors became worried about Greece today (not yesterday and not a month ago) is funny.

The market went down because it was overbought. Over the last two weeks I repeatedly mentioned about increasing volatility and high volume as an indication of coming changes. Whoever (from big institutional investors) was worried about "Greece" have left the market within the last two weeks. If you check the index volume (NYSE volume, S&P 500 volume, DJI volume and especially Russell 2000 volume) you will see it clearly. Now we see only a result of institutional traders' actions over the past two weeks.

P.S. Volume indicators continue to be my favorite tools in technical analysis.