Russell 2000

Over the past week I have been pointing on the negative sentiment on the major US indexes (Russell 2000, S&P 500, DJI and Nasdaq 100) - see daily posts in my new blog (follow the link in the header). It looks like the recent market movements are lead by the Russell 2000 index as it has higher volatility than volatility on the other indexes and volume surges are more noticeable on this index.

While volatility remains at relatively low levels, the odds are not high that the current correction may grow into a strong decline. However, after overall positive trading since September 2011 (8 months) we could expect some period of side-way trading. Still the danger o inflation may continue holding indexes and stock market from strong declines.

For more detailed daily outlook visit my new blog.

Long-Term Technical Analysis

As was promised in my previous "Simple Trading Strategy" post, I am bringing to your attention some points from my personal longer-term technical analysis.

Various techniques are used to analyze the stock market long-term trend. Some analysts focus on 5-year to 10-year charts, others focus on economic factors, etc. I would like to draw your attention to the interesting on my opinion fact that could be seen on daily charts (1 bar = 1 hour).

In the S&P 500 chart below (the Nasdaq 100 and DJI charts are very similar to the S&P 500 chart), you can see that the stock market has been in a recovery movement since the first half of March, 2009. This is when the "2008 Stock Market Crash" ended. Since then, the stock market has been in a steady upward movement, interrupted by shallow corrections from time to time. If you take a look at these corrections, you will see that the further from the bottom indexes (S&P 500, Nasdaq 100, DJI and other indexes) are, the smaller are the overbought signals that are required to push the stock market into a downward correction. You can see that this divergence between price's new highs and technical indicators (price makes new highs, but smaller, overbought indicators signal a correction) on the S&P 500 chart below on SBV, Stochastics and RSI. I think that you may find the same tendency with other technical indicators as well.

The S&P 500 Chart with elements of longer-term technical analysis

Such divergence between price and technical indicators is nothing new in technical analysis. You can see something similar more often in smaller timeframes. It usually can be seen before a stronger change in a market trend. That means that the stock market is not the same as it was six months ago when a majority of shorter-term, overbought signals were ignored, while indexes continued their rally. I am not saying that the market will crash tomorrow - not at all. The indexes and the market may continue to move up. What I want to say is that the market may become predisposed to a change in its behavior.

If this divergence between new price highs and technical indicators continues to develop in the same direction, there could be several possible scenarios: we may face a stronger downward correction than we saw and then the recovery may continue; we may go into a sideways market like we were in during 2004 after a strong recovery in 2003 that followed the 2000-2003 stock market crash; we may fall into a slow depression like there was after 1929 crash; or there could be something new.

There is still another possible development. In the same S&P 500 chart above, you can see that we had two waves of divergence between price and indicators where the second wave was smaller (less Bullish) than the first one. There is a possibility that a third wave of divergence might develop that could be smaller than the second one.

Another factor that could support the above-mentioned possibility of changes in stock market sentiment is timing. It soon will be a year since the recovery began. That means that the period of "expectation beating reports" could be over very soon. During the crash in 2008, many public companies reported losses and, by the end of 2008, everyone had lowered their expectations. Furthermore, in 2009 everyone has had "expectation beating" reports that have attracted investors and money into the market and which feed the recovery. How many companies do you think will report an "expectation beating" increase in profit in 2010 in comparison to 2009? If not many, other economic factors (unemployment, sales, GDP, borrowed money from China, etc) may begin to play roles in the market's direction.

I don't want to dig deeply into a fundamental analysis of the economy and economic factors that move the long-term market. I just want to say that I see some predisposition to changes in long-term market sentiment and market behavior. Since I am not a long-term trader, I am not going to attempt to predict where the market will be in six months. What I'm trying to define right now is where the market may continue its move. Will it move up by going into a third wave of divergence or will it begin to change its trend direction? I think it could become clear by simply monitoring higher-timeframe index charts within the next couple of weeks.

What affects me is how the market reacts to the overbought and oversold signals and how I should adjust my trading strategy in order to avoid encountering an unpleasant situation. If I see that the market starts to react differently to trading signals generated by my technical analysis (my trading system), I usually take a look at longer-term index charts to see the general market stage. Right now, I am looking a little ahead. The indexes (S&P 500, Nasdaq 100, DJI and other) still move up more easily then dropping down and we still may see new highs and further upward movement. Yet, from a prospective of my technical analysis, I see that we are in a period in which the stock market could become predisposed to changes in the long-term trend.

Volatility

It looks like a conclusion I expressed in the last paragraph of my previous week's post (see "Technical Analysis" on 10/18/2009)" was correct call. Now, we may say that starting from the middle of October 14, 2009 the market has been trading in the sideway corridor. We may draw the upper line of this corridor trough the October 19, 21, 22 highs and the lower line of this corridor would be placed through the lows on October 16, 22 and 23. Three times the indexes (S&P 500, Nasdaq 100 and DJI) have bounced down from the upper line of this resistance corridor and now this is the third time when the indexes have come close to the lower. I think if the lower line of this corridor is broken then we may officially say that the stock market is in a correctional move down.

It is worth mentioning that over the last week we saw increase in volatility which could be considered as a Bullish sign. As a rule, lower volatility could be witnessed during up-trends and down-trends are accompanied by higher volatility. Over the last one and a half week we have several signals to go short, yet, they were not confirmed by an increase in volatility.

I mentioned in my previous post "it could be a good conservative trading strategy to wait in cash for stronger bearish signals". Now, if we take a look at hourly index charts we may see negative signals again, and this time the bearish signals are confirmed by an increase in the price volatility. Because of that I would say that at the end of this week the odds of the correction down are higher than they were last week (on October 16, 2009) when the indexes at the same level they are now.

Still, the technical analysis is not an exact science and the results of the technical analysis do not guarantee the market direction. The only thing I may recommend is to monitor charts. Personally I consider that an accurate analysis of several technical indicators should help any investors and every investor should have in his/her arsenal at least three technical indicators: 1) price based, 2) volume or advance/decline based and 3) one of volatility indicators. Maybe 50 years ago investors could rely on a single indicator in their analysis. Yet, the current market is not the same as it was before and you may not rely on a daily MACD only (or any other single indicator).

Stock Market Crash - 1974

As a continuation of the series of charts dedicated to the stock market crashes I would like to present the Dow Jones Industrials chart in period of 1973 and 1974 years. In almost 2 years the  Dow Jones Industrial Average (DJIA) lost over 45% of its value - not the worst but still the pretty bad and prolonged recession. The crash came after the collapse of the Bretton Woods system, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. The recession was compounded by the oil crisis in October 1973.

Chart 1: Dow Jones Industrial chart, 1973 - 1974, 1 bar = 3 days

DJI Chart

I have expressed in my last week three factors worth of attention. One of them was the indexes (S&P 500 and DJI) moving sideways on the January 6, 2009 high levels. The recent bounce down from these levels confirms that these resistance lines indeed are sensitive for many traders.

While shorter-term charts and technical analysis are positive and show some odds of possible move up to the recent high levels (June 11, 2009 highs), the longer-term charts and analysis are not as optimistic. From the chart below you may see the significant drop in the daily volume which means that the main players (long-term institutional investors – "Big Money") finished investing (relocating funds) into the stock market. Starting from February 19, 2009 these institutional traders were attracted by the bargain cheap price of the under evaluated stocks and were buying in huge volumes. Their buying power was the main engine that pushed the stock market up. Now, when their buying power became somehow exhausted (trading volume become lower) we may expect the stock market trend be more dependable on the smaller players’ sentiment. I would put a question in this way: "Are the long-term non-institutional traders (who have a lot of money but not big bags) encourage the March-June rally up or they consider that they may enter the market later at lower price or when they are more confident?"

The positive thing is (I repeat what I mention in my several past posts) that the volatility is down. That means that even if we see strong correction down it’s not going to be unexpected sudden 10% drop down and most likely majority of the technical studies including trend-following indicators will be able to signal this correction. Actually, I consider that the trend following indicators could be the best in this situation. We already may see some negative money flow; we may see some overbought conditions; we understand that even for the further healthy recovery a correction down would be ok – all we need a confirmation from the trend-following technical analysis.

Stock Market Crash - 1987

Another nice picture of the stock market crash in 1987. On "Black Monday" - October 19, 1987 - the Dow Jones Industrials dropped 22.68% in a single session. This was the biggest percentage drop in the DOW history. It is interesting to see the extremely high volume surge during this crash which marked the bottom of the panic selling. Since volume is always 2-side transaction this huge volume indicates that somebody was buying in big volume from desperate traders until the end of October 1987 - in 11 month (in September 1988) the DOW index was back above $2,700 level.

This volume chart is a perfect example of how institutional money collected underpriced shares from traders who was in panic

Stock Market Crash - 1929

I just thought it would be interesting to see the nice charts of 1929 stock market crash. I had opportunity to browse these charts (courtesy ofwww.marketvolume.com) and decided to share it.

As you may see from the charts below, 200 pointsof crash down in 2 months in 1929, then 100 points up for the next 5 months (until May 1930) and then 2 years and 2 months (until July 1932) down to the $40 level. Keep in mind that 200 points at that time is more than 50% drop from the top in September 1929.

Chart 1: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days



Chart 2: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days

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.

Sideway Market in May

Just a quick and short follow up after my "S&P 500 Chart" post on May 24, 2009. I was somewhat bearish, yet we had strong up move yesterday based on the economic data (see "Economic Calendar" I have mentioned about sensitive levels at the May 13, 15 and 21 lows (see lower blue line in my previous post) and we had bounce up. Today we had a decline again and, now the S&P 500 bounced down from the top sensitive level (see top blue line in my previous post). The indexes has become a little bit more volatile over the past few sessions which mean more close attention should be given to the intraday charts or more conservative approach could be taken to stay in cash until a trend is defined more clearly. The market has been flat since beginning of May 2009 (see 1.5-year chart view) and there is a serious danger of having strong correction (see higher timeframe charts).

Industrial and Financial Sectors

Just a short post. Today's daily volume on the S&P 500 index is the biggest volume over the last 2 months. Taking into account that this volume surge has been noted during the price advance I would assume that we may possibly see the shift in the supply/demand balance. Similar situation could be seen on the Dow Jones Industrial index. The Nasdaq 100 index does not have such high volume surge, however, this index has been moving flat for the last three trading sessions. Comparing different market sectors I may say that the highest trading activity could be read in the industrial sector ( DJI, Nasdaq Industrials, Nasdaq Capital Markets). I can see high volume in the financial sectors as well - Nasdaq Banking and Nasdaq 100 Financial - yet not as big as in the industrial. Other stock market sectors (DJI,DJU, Nasdaq Internet, Nasdaq Computer) have relatively smaller volume surges or do not have increase volume activity at all.

I do not know why we can see increased trading in the industrials and financial sectors. It could be because the investors are waiting to see Chrysler bankruptcy and how it will affect automotive market, or those investors who bought in February decided to pocket a profit or it could be something else. I know one thing - such big volume means that big number of investors (or small number of investors with big money) started to relocate their investments and that may lead to the change in the supply/demand balance and as a result to a change in the stock market sentiment.

I would personally watched very closely stock market over the next couple of sessions to see how the market will react on this volume. I am not telling that the market will drop tomorrow, it could continue to move up, however I would prefer to stay in cash for now. Maybe I'm wrong and maybe I'm loosing opportunity to make some profit, yet, I consider there are moments when it could be useful to stop and monitor for a while in order to see the development of events - in current situation development of reaction on this high volume.

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.

Simple Technical Analysis

I'll try do be short today. It's a Holiday.

In my last week "S&P 500 Volatility" post I have set next sensitive level market may try to reach. We may see now that the Nasdaq 100 index has broke those levels and run higher, S&P 500 index coming close and the DJI index still almost 1,000 points behind. I still consider that there is a tendency of the market to run higher. The main my argument is that during the recent recovery I witnessed that stock market ignored high volume surges to the up-move and reacted stronger on smaller volume surges to the price down side. It is one of the characteristics of the long term recovery (up-trend) when you need strong oversold indication to see small correction and even light overbought indication restores general market trend.

One one hand I am bullish in the longer-term, on the other hand it is second month when the stock market is in the recovery movement and it would not be a smart move to expect that it will be like this forever. The market will not go up without corrections. Even if my technical analysis (60-day chart I used in my previous posts) indicates higher odds of the further recovery, I'm not telling that in the next few sessions the same technical analysis could turn from bullish into bearish. If the S&P 500 and DJI indexes come to the levels where they stuck (moved flat) in December 2008, there is a possibility we may see flat market again. A lot of traders were entering position in period from the end of October 2008 until beginning of January 2009 (see 2-year DJI chart) and many of them will be in the position to make a trading decision - to keep a position opened or close it with small losses/profit. That is the reason why I call those levels sensitive.

Even the market is positive at this moment the volatility is still high and it's not a time yet when we may forget for intraday charts and take a look at them once a week.

Happy Easter to everyone.

S&P 500 Volatility

Isn't it nice to watch rising market. Last week on March 29, 2009 in my "S&P 500 Chart" post I have mentioned about increased possibility of the a correction down and we had it. Now, the stock market is up again. We see over the last month what I would call "one step down, two-three up" - we have shallow correction down and then strong continuation of recovery. Again, I repeat what I stated on March 22 in my "Short Technical Analysis" post:

...March 6, 2009 bottom was the last drop in the recession and now we are in the long-term recovery. In this case this bullish volume could be ignored and could indicate long term change in the stock market sentiment as it was in period from March 12 to March 21 of 2003...

That is exactly what wee see: big bullish volume surges during the index up-move are required to push indexes into a small correction, while even small bearish volume surge reverses the indexes back into the up-trend. It's not just about volume indicators. If you take a look at other technical analysis indicators you may notice similar picture: only after strong oversold signal the indexes go down and weak overbought signal push indexes back into recovery mode.

That is exactly what we see when to we do shorter term technical analysis: big bullish volume surges during the index up-move are required to push indexes into a small correction, while even small bearish volume surge reverses the indexes back into the up-trend. It's not just about volume indicators. If you take a look at other technical analysis indicators on shorter-term charts you may notice similar picture: only after strong oversold signal the indexes go down and weak overbought signal push indexes back into recovery mode.

To better understand this shorter term phenomenon we have to take a look at higher timeframe charts. Yes, 60-day chart is good and I use it in many cases to define the general market sentiment, yet, time on time look at higher timeframe is recommended.

From the 2-year S&P 500 chart (1 bar = 2 days) below you may see, that even we had high volume over the past month, from the long-term prospective it is still volume at the bottom – it is still bearish volume and the market is still strongly oversold on this chart.



The stock market sentiment (sentiment of the Nasdaq 100, S&P 500 and DJI indexes) is positive on this chart. The next sensitive level for S&P 500 is $900 and for DJI is $9,000. We saw a lot of volatile trading around both these levels in period from October 2008 until January 2009.

On the same S&P 500 chart above I have plotted ATR (Average True Range) indicator to display the market volatility over the past year. I mentioned several times that volatility technical analysis is recommended for every trader. The purpose of this analysis is to recognize different stock market stages and adjust technical indicators and trading systems to the current market condition. By following the market volatility I would say:

• Before June 2007 the ATR was in the range of 10-15 points – we were in uptrend.
• In June 2007 the S&P 500 volatility doubled – first sign of recession.
• The Volatility stayed on the June’s level (in the 20-30 points range) until August 2008 – From June 2007 until August 2008 we were in recession.
• After August 2008 we had sharp increase in volatility (up to five times) with peak on October 22, 2008 – it was stock market crash (it was not any more a recession, it was crash).
• We had extremely high volatile market in period from August 2008 until November 2008 – stock market crash.
• Since then the S&P 500 volatility dropped down and basically stays on the June 2007 - August 2008 levels. I would call period from December 2008 until February 2009 as "after crash distribution" or as "levelling" when those stocks that still have to go down went further down (DJI stocks) and those stocks that were healthy and already undervalued remained flat (Nasdaq 100).

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.

Citi stock

In the beginning of March I have put a question aboutCiti Group stocks. I usually do not trade stocks, yet such periods when you have so many underevaluated companies are not coming very often in the history of stock market. Yes, after I make Citi point the Citi Group stock dropped from $1.50 to $1.00 and my congratulations to those who did not panic at bought it at $1.00. Not it is at $3.00 and that is 200% higher.

Support Level

Over the last two weeks in my "Technical Analysis" post on March 9, 2009 and "DJI Chart" post on March 1, 2009 I have pointed that the huge trading volume seen on the indexes would definitely lead to the strong reversal. Last Sunday I have even mentioned that whoever entered long position after February 27, 2009 (day when we started to see huge increase in the volume) could be a winner very soon. Now, we had a strong rally up and basically the results of my previous technical analysis are confirmed by that.

As you may see, the volume based technical analysis sometimes could be very easy and in some cases it could be very complicated. As a rule it is easier to analyze volume on the longer term-periods and it is easier to define support levels. On the longer term charts and at support levels volume surges are stronger and more noticeable. Yet, when it comes to the shorter term charts and defining resistance levels volume based technical analysis becomes more complicated: volume surges are not as clear in the resistance as they are in support, and with smaller timeframes you have to consult higher timeframes charts to see general market trend and analyze volume in accordance to it. The same principles should be applied not just to volume but to any technical indicators. The difference between volume and price based technical analysis is that the volume shows the market sentiment that is based on the money flow, while price indicators rather follow the event. Volume never lie, yet, traders do mistakes in analyzing it. I'm not stating that the volume is the best technical indicator. It is difficult and sometimes almost impossible to apply volume analysis to low trading stocks. That is why volume works best with indexes.

Now, after the strong rally it is logical to ask if the market will continue to recover. There is no doubt that over the last couple of sessions the market could be considered overbought at least in short-term. Yes, if we take a look at 1-year and higher timeframe charts we may see that the stock market is still heavily oversold (especially DJI sector, then S&P 500 sector while Nasdaq 100 companies are less oversold). However, when you go to the lower timeframes you start to see some indications of overbought market. From this I would assume that the market still has power and most likely will go higher, however, price does not move up all the time - it moves up by having corrections down time on time. Taking look at the smaller time-frame charts I may see that we could be looking forward if not for a correction then at least for slow down and flat market.

I think everybody now believe that March 6, 2009 has market very strong support level due to the volume output in period from January 20, 2009 until now. I do not think we will see index back at this levels very soon. It is too early to judge if this is the end of the recession - it is not something that should be done after four positive sessions. Yet, I think we could expect good market over the next couple of month.

Stock Market Regulation

I'm a simple trader and this is just my thoughts. I'm not an expert, yet, on my opinion government and SEC has to do something to protect stock market from tragic and devastating crashes and only then pump money in the economy. Not to be judged as a person that screams only (based on my previous "Stock Market Crash and Regulations" post), below I set a few points that I think could protect the stock market from devastating crashes. Of course it's not my job - government and SEC could do better and I hope they will do:

1.  Banks should be separated from the trading on Wall Street. The purpose of the bank is to provide money communication between people, companies and government. If the banks start to play trading games on the Wall Street and then bank's trading losses on may affect the main purpose of the banks and the economy as a result. We can have investments banks and other investments institutions, yet, they have to be separated from the banks that provide money communication between people and businesses, that lend money to the people and businesses, where people and businesses keep their savings.
2.  If the market has dropped for more than 10% in three consecutive trading session the SEC has to prohibit playing short (selling stocks short, buying put options, selling naked calls .....) for the next three trading days and whoever is in the short position has to receive a margin call to close the short position within these three days. There are a lot of traders and hedge funds who can turn small decline into a devastating stock market crash. I am sure that the SEC may come with better numbers, yet, I believe that we need some rule to protect the stock market and the economy from the big players who has big money and who does not care about economy crash if he/she can make money on it. People should be able to trade short, yet, in the moments when stock market crash starts to affect the economy people should not have interest in destroying the economy. Stock market has to have ability to crash. During the crash market cleans itself. However, the crash should not be amplified by those who playing short or it will be turned into economy damaging process.
3.  Traders, hedge funds, portfolio managers should be prohibited to have more than $100,000,000 ($100 millions) in short position. Exception could be made only for those portfolio managers who has more that 70% of their funds in the long position, then the rest 30% of their funds even if is more than $100M could be in the short position. Wall Street should stimulate economy not crash it. Again, I am sure SEC can come with better numbers.

So, do you think such rules protects the economy and traders from the manipulators who does not care about the health of the economy, or such rules are a threat to the free stock market...

Stock Market Crash and Regulations

Will pumping money in the economy help the economy to recover? Sorry, so far, we were not pumping money in the economy we were feeding the Wall Street. We are told that we have to take a look at the source of the problem and then eliminate it and only after that start treatment. Last year we took a look at the source of the problem and what was done? We have found that the main reason of the stock market crash is unregulated market, unregulated trading, unregulated Wall Street. We are told that the main reason is bad mortgages, however, who generated these bad mortgages??? Nobody even talks about that, in opposite we continue to feed unregulated animals. Why??? Will it help to recover??? We bail out a lot of public companies, and they continue asking for more money. Did nobody get it?

It could be weird that a trader is asking about more regulation on the market. We always were threatened that regulations mean end of the freedom. Wrong!!! Freedom starts with regulation and rules. We have police on the street, we have driving rules, we have judges and courts, we have criminal and civil laws - does it mean we are not free??? FREEDOM NEEDS TO BE PROTECTED. That is why we have all of this. The same is in the stock market. Free trading, free stock market has to be protected. When I mention about rules and regulation on the stock market I mean rules and regulations that protect economy from bubbles and crashes, rules and regulations that protects the investments from the stock market games.

After the Stock Market Crash in 1929 the following regulation were implemented:

1. The Securities and Exchange Commission (SEC) was established;
2.  The Glass-Stegall Act was passed to separated commercial and investment banking activities.
3.  In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

In 1987 after the stock market crashed, again we saw new regulation intendment to protect investors:

1.  Uniform Margin Requirements;
2.  Circuit Breakers. The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.

After Stock Market Crashed in 2000 new rules for day traders were introduced. Apparently previous Government was not able to do more.

We have recent stock market crash, NOTHING DONE. Haven't we learned anything from the recent crash?

DJI Volume

In spite my last week neutral to slightly positive outlook (see "Technical Analysis" post on February 15, 2009) the market crashed during this week strongly down. If last Friday majority of my technical indicators were mixed with small dominance of positive sentiment, then on Monday February 17, 2009 right after the market opened all of them became negative.

It's like a "black irony" - right after the first bailout was announced back in September 2008 the market went strongly down. Now, again, when Wall Street smells the money it crashes market down by making a statement "I need a piece of pie"... Could it be that the recession will continue as long as we pump money into the Wall Street? We are trying to cure the "Monster" by giving him what make him sick in the first place and by hoping that he will recover very fast. Could it be that only when we stop feeding the "Monster" he will realize that help is not coming anymore and he start recover slowly but steady?...

It was some attempt to be ironic, but let us go back to the numbers and take a look what we have now on the stock market. Take a look at some statistics:

Index	November 2008 Low	October 2008 Low
Main Group
DJI	Below this level	Below this level
Nasdaq 100	Above this level	Above this level
S&P 500	Above this level	Below this level
Exchanges
NYSE	Above this level	Below this level
NASDAQ	Above this level	Below this level
AMEX	Above this level	Above this level
Other indexes
Dow Jones Transport	Below this level	Below this level
Dow Jones Utilities	Above this level	Below this level
S&P 100	Above this level	Below this level
S&P 400	Above this level	Almost the same
S&P 600	Above this level	Below this level
Russell 1000	Above this level	Below this level
Russell 2000	Above this level	Below this level
Russell 3000	Above this level	Below this level

By scrolling through the table above can we make an assumption that the recession has stopped for majority of the public companies back in October - November 2008 and only big monsters who are not profitable and not flexible enough to restructure its production (DJI and DJT companies) are drugging the stock market further down? Shouldn't we let them die and let other companies to grow on their ashes? Isn't the purpose of the recession to clean the market from old not profitable companies and let the new to be built?

Another interesting fact is that daily volume on Friday February 20, 2009 was third biggest daily volume in the history of DOW. The only biggest volume in Dow Jones Industrial sector was seen on September 16, 2008 (on September 19, 2008 the DJI index was 7% higher) and on October 10, 2008 (on October 14, 2008 the DJI index was 10% higher).

I think this volume is very important and indicates extremely high panic selling in the DJI sector and at the same time it shows that somebody started to satisfy the demands of the panicked traders. Who is buying from those investors who are panic? - I do not know. Could it be the Government started to buy by using second part of bailout money set in October 2008 in order to take a control over these companies? If yes, then I would consider that they are smart... But it does not really matter for me as an investor. All I know that such huge volume surge marks the bottom when those who wanted to sell in panic are satisfied and the number of willing to sell is dramatically reduced and we will see the market up in a couple of trading sessions. I’m really scary for those who went short on Friday 20, 2009 and I would not like to be on their place now.