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.

S&P 500 Chart

Let's put aside automaker's business and take a look at technical analysis to see what indicators tell us. Overall, the hourly charts (1 bar = 1 hour) are similar on all major indexes (NASDAQ 100, S&P 500 and Dow Jones Industrial) and majority of the indicators are pointing to the dominance of the Bullish sentiment. The question is, for how long? Until the November 28, 2009 high is hit?


There is no doubt that the market has set new support level on November 21, 2009 (see my "DJI Analysis" post) and it looks like November 28, 2009 high is another sensitive point that should be watch closely. If the indexes break this high and move higher, there is a possibility that we will not be back down soon. Yet, if this is not the end of recession and the market meant to be even lower, most likely we will see bounce from this top with further attempt to retest the November 21 support.

So far the indicators are Bullish, however the recent recovery has pushed the stock market into the short-term oversold condition. The market is still very volatile and what seems today Bullish may turn into strong Bearish tomorrow. That is why I still consider monitoring charts during the trading hours as very important part of trading. This is not a time when you can come to the chart once a day after the market closes or once a week. I do not believe in the mid-term trading now either, you may trade short-time or for long-term investment you may use simple strategy "Buy every time you see big volume surges during the decline".

Support

As a confirmation of my yesterday statement we had today continuation of the recovery rally. The DJI and Nasdaq 100 indexes are almost 13% from the bottom while the S&P 500 index moved up for more than 14% in two trading sessions. As you may see, in spite the horrible news about automakers the stock market gave us strong rally up. Why? - because of the huge volume surges that stopped decline and reversed the trend. As I mentioned yesterday huge volume during decline means that we have the bottom when the price is so low that it become attractive to the institutional investors who started to buy in big volumes by satisfying demand of the retail traders selling in panic.

Is this the end of the recession? - I do not know. I think it's too early to discuss it. In short term I would expect to see further move up - at least my technical analysis show this possibility. On the other hand 10% profit should make any trader to think about profit protection strategy (trailing stop for instance).

Index Volume

Another great day, another huge volume. As I mentioned yesterday in the "DJI Volume" post, today we had drop at the market open and we had strong recovery. I usually do only one post a week, yet, the last and current weeks are rich on events and volume. Now, by looking at this volume I would expect to see the indexes at least above the September 12 highs and I'm not going to be surprised to see them even above August 11th highs as well.

I do not look far ahead, yet at this moment my technical analysis suggest to expect strong recovery. Such huge selloff we saw last week and last two trading sessions has to be paid off by recovery movement. The history suggest (see historical volume surges statistic in my "S&P 500" post) that panic selling leads the market into oversold stage. High volume in indexes indicates that we have traders who started to satisfy demands of the panic sellers and that means that we will run out of panicers very soon and that means that we will have up-trend.

You now, it is worth to pay for several years of access to the volume of S&P 500, Nasdaq 100 and DJI without trading at all in order to spot just such moment as we have now, as we had in July 2008, in January 2008 and so on...

Support?

Today's morning was pretty scary...Yet, if I'm right and as stated in my previous "Oversold" post the stock market really heavy oversold, then each such drop should be used to buy...

My outlook stays the same as it was 2 days ago. Now, by adding 2 more day of extremely high volume at these low levels I have even more assurance in the very strong recovery. Even Lehman Brothers Holdings' drop was not able to stop the Nasdaq 100, S&P 500, DJI and other indexes from the today's recovery...

Sorry, for the short post (if somebody reads it) I do not usually do any posts during the week, yet I like this week and I think we have it, we hit the bottom. I'll try to post a chart during this weekend with 1-year or 1.5-year chart - you have to see it (again if somebody read it).