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.

Nasdaq 100

Last week in my "Advance/Decline" post on January 24, 2010 I have expressed my thoughts that taking into account volume and advance/decline indications on main indexes (S&P 500, DJI, Nasdaq 100) we could be closed to the bottom of the current correction. However, the past week was negative.

The Nasdaq 100 index was the main player who pushed the market down. The Financial Sector (see S&P Financials), Housing Sector (see PHLX Housing Index) and some other market sectors were flat. The S&P 500, DOW indexes (DJU, DJI, DJT) where flat the first half of the week yet slides by the end of the week under the pressure of the hi-tech companies from the Nasdaq 100 index.

You can hear in the media that the market is upset by the political balance, that Wall Street was worried about Bernanke re-election, that banks were upset by the proposal of the additional taxes, etc. I just do not buy it - those news are not the news that moves market.

Take a look at the Nasdaq 100, DJI and S&P 500 5-year chart. The Nasdaq 100 index during the 2008 stock market crash had smallest loss, there were no big volume surges during the stock market crash and the Nasdaq 100 had strongest recovery after the crash. What does it tell? It simply tells that the main panic was in the financial and transportation sectors. That is why S&P 500 and DJI crashed stronger. The big investors were desperately pulling money out from these two sectors - that is why we may see huge volume during the crash on the S&P 500 and DJI indexes. Big investors were not pulling funds out of the Nasdaq 100 companies - there were no huge volume surge in this sector during the stock market crash. In opposite the big investors were relocating funds from the transportation and financial sectors into hi-tech companies. That is why the Nasdaq 100, Nasdaq Biotechnology, Nasdaq Computer and Nasdaq Internet indexes completely recovered by the end of December 2009 from the 2008 stock market crash.

Now when the Hi-tech sector was at the top, the some of big investors started to take profit out. Does it mean we will see another strong down-trend? Not necessary, for this we need to have strong panic news like bubble in housing sector (2008), internet bubble (2000), etc. Yet, I think the period of the recovery rally on the Wall Street from the stock-market crash could be over and now we could see something like we saw in 2004-2006 - quiet up and down trading with positive or negative bios until somebody make a new bubble.

Stock Market Crash Stages

As was mentioned before (see my "Side Way Market in May" post) the indexes continue to move in the corridor defined by May 8, 2099 high and May 13, 2008 low. Now, the indexes are close to the upper edge of this corridor: the Nasdaq 100 index has hit this level yesterday, the S&P 500 is still about 10 points below this level and the Dow Jones Industrial is approximately 70 points below.

Only one nice trading session is needed for S&P 500 and DJI to hit this level and if it is broken it could mean that we may see further move up. However, I consider that the odds of the bounce down again are still good. The stock market (when I mention stock market I assume the main U.S. indexes which associated as market barometers: DJI, S&P 500 and Nasdaq 100) has been in a sideway move only for a month. To see the picture better, I may recommend checking higher timeframe index charts - from 1-year to 7-year views.

From the higher timeframe charts we may see that the stock market has been in recovery for 2 months (from the beginning of March to beginning of May 2009) and the whole May the market was basically flat. By comparing recovery after 2000-2002 stock market crash to the current recovery I may say that:

• The recent stock market crash was stronger;
• We had 3 bounces from the bottom in the previous recovery: August 2002, October 2002 and February 2003 (war in Iraq was lunched). We had 3 bounces from the bottom in the recent crash as well: October 2008, November 2008 and February 2009;
• The first recovery wave in 2003 was 3-month long and then the market was in 2-month flat stage. The current move up was 2-month long and we see market in sideway move for a month only;
• In 2003, after 2-month of flat stage, the stock market went up again.

To better understand the stock market crash, recovery process and what could be expected next, I would divide the stock market crash into the following stages:

• Recession: The market is heavily overbought and it starts to move down. As a rule this move down is prolonged in time and this move down is not very scary. See period from July 2007 until May 2008 and period from August 2000 until March 2002. In this period a many investors start to sell, yet there are still investors who buy.
• Crash: As a rule during the recession the bad stuff about companies and economy is revealed and depending on how bad "the truth" is we have strong or extremely strong panic selling. The recent "discovery of truth" about financial companies' manipulation was much scarier than the "discovery of truth" about internet bubbled companies in 2000-2002. In this period we see panic selling - everybody selling and only small part of investors buy. In this period bad, weak and "fraud" companies go bankruptcy and good companies become under evaluated. This period is short and drop down is strong.
• After Crash Clean-up: The market still can go down and we may see bounces from the bottom. In this period investor are still selling, yet, the panic is not as strong as it was during the crash. Many investors (professional traders who see under evaluated companies) start buying attracted by low bargain price, yet, the number of Bullish traders is not big enough to reverse the trend. During this period we still may see "bad" companies go bankruptcy, yet, it's not very scary since, usually, it is an expected bankruptcy and many traders are already prepared to that. For this stage I would refer to periods from July 2002 until February 2003 and from and from October 2008 until March 2009.
• First wave of recovery: There is no panic selling any more. There are still sellers, yet, the number of buyers attracted by low price of good stocks become quite big to move stock market up. Even if we see bankruptcy during this period it will not affect strongly up-trend because all the "bad" companies were already removed from the major indexes. The companies are still under evaluated, yet not as strong and we start to see positive signs in the economy. At the end of this period we may see sideway move or small correction. It could be strong up move in short period of time: see periods from March 2003 until June 2003 and from March 2009 until May 2009.

As I understand (I could be wrong), we are at the end of the "First wave of recovery" and we still may see side-way market or even some drop down (automotive clouds are still on the "stock market sky").

In my next post I'll go back to the shorter term index charts (S&P 500, DJI and Nasdaq 100 charts) to show what my technical analysis tells about shorter-term trends and current market sentiment.

S&P 500 chart

A few days ago in my "DJI Chart" post I have pointed to the possibility of indexes running to the new level which was confirmed by the further recovery. Now, at the end of the week the odds of the correction down have been increased. A month of strong recovery (with the small correction on March 19-20, 2009 only) have been pushed market into the overbought condition (at least for a short-term). Even if stock market is not any longer in the recession, for healthy recovery at least some small corrections are needed and sensitive level drown by me in my previous post is on my opinion a level when we may see at least flat market or correction down.

Technical analysis, based on the standard indicators I usually use, show the buildup of bearish sentiment. All technical indicators (SBV,Advance Decline, Stochastics, RSI and McClellan Oscillator) on the S&P 500 chart below are bearish. If you apply the same indicators to the Nasdaq 100 and DJI indexes you may see similar picture.


Now taking look back on February 9 – March 6, 2009 decline I would separate this decline from the recession and global stock market crash. I still consider that the stock market crash ended on November 21 of 2008. By that day everything was crashing down. Yes, S&P 500 and DJI indexes dropped below November 21st lows, however since then the indexes are not as volatile as they were before and some of the indexes (Nasdaq 100, S&P 400, Dow Jones Utilities...) remained above or at the November 21st lows during the February 2009 decline. I would more consider the February's decline as levelling when some of the companies (financial, automakers) still had to go down while other market sectors (computer, telecommunication, biotechnology, etc.) already hit the bottom and during February 2009 went down only because financial and automakers sectors are very big and their trend influences other companies. Yet, I could be wrong and I would not go deeper into fundamental analysis – this is not my field.

What is next

Sorry, no time to make any post during the week... This is not something I use to make money - I use it to put my thoughts in the order. I believe every trader knows that there are periods in the trading when you want run into the forest, find the dippiest hole, hide your head in and wait for a miracle. Usually such moments end with the portfolio crash.

To keep myself in the shape and avoid such situation I have this blog. The obligation to have at least one post a week make me to keep my head clear and to watch the market without emotions. If you see that you may not control your emotion, start a blog. The filling that somebody read what you write will make you to be unemotional and that may help you in trading.

Now, is not a moment for me to run into the forest. I'm happy. If you look at my previous posts the last two days I see exactly what I expected. Telling the truth the market exceed my expectation (see my previous "Nasdaq 100 chart" post). Even today's drop at last 10 minutes of the trading session looks promising (take a look at the volume during these 10 minutes...)

What is next, so far all my indicators are bullish and are pointed toward the October 14, 2008 highs. In such volatile market, the indexes especially the DJI may do it in a single trading session. As I mentioned several times before, only when I see that these highs are broken I can more or less be positive that what we saw on October 10, 2008 could be the end of the stock market crash. Again, I repeat, market is extremely volatile (watch ATR) and if you do not have ability to monitor charts during the day it's better to stay out of the market, unless you would like to invest into long-term (401K and IRA), last week was a good time for that (read my previous posts)...

See more in my weekend post.