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.

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.

Big Volume

Another day on the high volume - now, we may see it on almost all indexes. Still, the Russell 2000 index has the biggest volume surge.

I think something is going on. As you know, volume is always two side transactions and the number of sold shares is always the same as number of bought shares which is equal to volume. Price moves up because there are traders willing to buy at higher than the current market price. Big volume surge at high price means that somebody (who has huge number of shares – could be institutional investors) decided to dump those shares to bullish traders and fix profit.

Russell 2000 Volume

I usually do not post during the week. So, just a quick note for those who track indexes, especially for those who trade Russell 2000 index and its derivatives (Russell 2000 emini...):

Check the volume in the Russell 2000 sector over the last two trading sessions - I have not see something like that in the Russell 2000 sector since September 18-19, 2008...

Technical Analysis

Coming back to the technical analysis I may say that do far we have not seen a market reaction on the oversold indication seen on January 21-22, 2010.

The good news is that the S&P 500, DJI and many other indexes did not dropped strongly since then, by indicating a possibility that these indexes hit the bottom of the correction. If you check the S&P 500 financial sector index you will see that this index is at its low (support) level which was already tested in the middle of August 2009, beginning of September 2009, beginning of November 2009 and December 2009. For many indexes (like in case with S&P Financial Index) the current level is very strong support level and the fact that these indexes had difficulties in following the Nasdaq 100 last week decline is a good sign.

The bad news is that the Nasdaq 100 indeed declined. I have seen many times when the down move or up move was started by one index and then it was picked up by the rest of the market. The fact that the Nasdaq 100 declined strongly and indexes ignored the oversold signals on January 21-22, 2010 tells that we still could wait for another wave of panic selling.

From this point of view I would say that the odds of the end of the current correction are 50/50 and I would say that a lot depends if the rest indexes will get into selloff scared by this week's selloff in the Nasdaq 100 sector.

So far the technical analysis of the charts suggests possibility of the further decline. However, there are many signals that suggest oversold condition and possible support. Some of them are:

1. Low negative MVO on all indexes which would indicate big bearish volume surges and strong panic selling in all market sectors - this usually leads to the shift in the supply/demand balance and reversal. It worth mentioning that the daily volume in the Nasdaq 100 sector on January 29, 2010 is the strongest daily volume in this sector since April 20, 2009.

2. Low Advance/Decline readings on major indexes would suggest the oversold condition and possibility of the reversal as well.

3. High volatility. If you check the ATR(9) on the Nasdaq 100 1-year chart you will see that the volatility on this index is at its March 2009 level (bottom of the stock market crash). On the S&P 500 and DJI indexes volatility have climbed to the beginning of November 2009 level (support of the October's correction).

I would say that the oversold signals are very strong and we may see strong bounce up. However it does not mean that we will have it tomorrow. What I want to say is that the stock market is predisposed for a recovery move up, however it still could slide lower. I may say only that because of the high volatility I would expect to see sudden and strong reversal and it could be tomorrow or it could be in a week. In this case I would only recommend monitoring shorter-term charts as well as some lagging indicators that would confirm a reversal.

Advance/Decline

It was clearly bearish week. In my previous week "S&P 500 Chart" post on January 18, 2010 I  have stated my points, why do I believed in to coming correction. The main my point was an increase in volatility. By following my words, we had strong advance on Monday, which only moved volatility level higher, and as a result the strong decline for the rest of the week. On Thursday January 21, 2009 in my "Volume, Volatility and Advance/Decline" again, I have confirm that this does not looks like the end, mainly because advance decline reading did not hit critically low levels by indicating panic selling. As a result, as I mentioned the previous post "the next move down could be even stronger than we had over the last two days" Friday, the last day of the week, brought us even stronger decline.

One more time you may see an importance of monitoring several technical indicators at the same time. In my understanding professional technical analysis combines analysis for the price, volume, volatility and advance/decline data. One may say that he/she can use a price indicator with success. However, without volume, advance/decline and volatility technical analysis I do not believe it is possible to define the current trend stage, to see where the stock market is moving, predict possible strong changes in a trend and be on the alert when market, index or stock may crash. Only combined analysis of volume, advance decline and volatility data may give you one step ahead vision. Those who disregard these data, I believe, sooner or later, will be caught by the week similar to the one we just had.

The same is with indexes. Even if you do not trade indexes (ETFs and other index tracking securities), you have to monitor and analyze them. If your stock was generating buy signals this week and you did not understand why it did not move up, then by taking a look at indexes you would understood that the general bearish sentiment took over the stock market and your stock was drugged by the general stream of the market.

Coming back to the technical analysis, I would like to say that on Friday January 22, 2010, the S&P 500advance/decline readings did dropped to the extremely low level by indicating strong panic selling. We have not seen such low advance/decline reading in the S&P 500 sector since November 27, 2009. The indexes and market may go further down, however, the history analysis (that is done since 1997) shows that at this point we may see a strong bounce and resumption of the up-trend – unless there is a stock market crash (I do not think that this is the case).

Another point is very strong daily volume over the last two days of the week. On those days, the daily volume in the Nasdaq 100 and S&P 500 sectors were the strongest one since December 18, 2009, and on DJI it was the strongest daily volume since December 4, 2009. If we see e decline in volume activity, the principles of volume based technical analysis would suggest that the panic is over and we may see a reversal.

Taking into account volume and advance/decline indication I would not risk by holding the short position right now. The only what I would accept is a trailing stop which would protect earned profit and would give a chance to make more. Yes, we still may see slide down or we may see modest advance and then decline to the new lows. However, I think we are close to the bottom of the recent decline.

I am not stating that we are at the longer-term bottom and over the next few months we will have bullish market as we had after November 27, 2009. We can have it, but it is not necessary has to be the case. We can have just bounce to the most recent high (January, 2010 highs) and then we can have slide again. I do not know what is going to happen in a month. Even if I look on longer-term charts, my view is always adjusted by new coming data and could be completely changed. Right now my technical analysis tells me that we could be close to the bounce up. If this happens, then we will take a look at the next step which, in my case, would be based on the combined technical analysis of price, volume, advance/decline and volatility data again.

DJI Chart

As you may see from the DJI chart above majority of the technical indicators are bearish by pointing to the possibility of further decline. By comparing the DJI index to the S&P 500 and Nasdaq 100 indexes I may see similar sentiment with difference that the Nasdaq 100 index is less oversold.

S&P 500 and Dow Jones Industrials have become heavily oversold during the last week. The DJI trading volume on Friday did beat all historical records. Even the technical analysis is more bearish, because of this high volume surges during the price decline and heavily oversold indexes, I would recommend monitoring chart on the intraday basis very closely. With such high volume, as a rule, comes strong reversal. On the S&P 500 and DJI the recent volume surges are much stronger than those that we saw in October and November of 2008 and all of them lead to reversal. I do not think that the recent high volume explosion is going to be an exception. We may see reversal and it could be tomorrow or it could be several days after. Taking into account the magnitude of this volume surges we may face very strong and sharp up move.

Oversold?

Unexpected news and unexpected crash, at least for me. Yet, after the reading the news at the morning we know the market reaction on them. We’ve already been there in January 2008, and we already witness July 2008. This is the third financial company that is suffering. In both previous cases we saw it at the very bottom and then we had a strong rebound.

The last two trading session we had extremely high activity (trading volume) on the stock market which could be compared to the daily volume in the January 2008 and July 2008 only. Let's take a look at some historical record daily volume numbers below:

	NYSE	S&P 500
1st Place	January 22-23, 2008	January 22-23, 2008
2nd place	September 8-9, 2008 (now)	July 15-17, 2008
3rd place	July 15-17, 2008	September 8-9, 2008 (now)
4th place	July 11-16, 2008	July 11-16, 2008
	AMEX	DJI
1st Place	July 15-17, 2008	January 22-23, 2008
2nd place	September 8-9, 2008 (now)	January 16-18, 2008
3rd place	July 11-16, 2008	September 8-9, 2008 (now)
3rd place	January 22-23, 2008	July 15-17, 2008

Isn't it interesting... I always associate high volume surges during the price slide with panic selling and extremely high volume - with extremely panic selling which lead the market into heavy oversold stage and as a result into strong reversal..

Based on the volume technical analysis (numbers above) I can set a few points for myself:

• I believe that we are at the bottom;
• I'm expecting to see very strong and sharp recovery;
• I assume that we may see further slide (there is always a possibility of that), yet, I believe, soon we will see the stock market much higher than we are today and than we were yesterday;
• I consider it's extremely risky to be in short now - personally, today, I would rather open a long position than tried to make some money by playing down;

Again, my technical analysis is my subjective view on the stock market. I do not recommend follow it, do not relay on anyone opinion - do your own home work, at the end if you lose you lose your own money.