DJI Chart

Nice week. From y last "S&P 500" post you may see that I expected some correction and we had it. Yet, the longer-term up-trend pushed the stock market higher by the end of the week. (refer to my 1-year technical analysis in my "New Highs/Lows" post on August 12, 2008 and my "DJI" post on July 20, 2008).

My outlook over the longer-term stays unchanged. The same as before I believe that the high volume surges in June-July 2008 have power to push the Nasdaq 100, S&P 500 and DJI indexes and the whole market much higher.

With shorter-term, I only may give one advice to monitor charts on the daily basis. For those who analyze charts, the Monday-Tuesday slide should not be a surprise, as well as Thursday-Friday recovery was clearly defined by the technical indicators. If today my 60-day technical analysis points to the higher odds of the further recovery (see chart below), it does not mean the the same technical indicators will be bullish the whole next week. The technical indicators on the 60-day chart can turn from bullish into bearish any time during the week. That's why I always say "do not trust my judgment, do your homework yourself and do it on regular basis. You skip it, you lose it. If you skip and did not lose that mean that you were lucky and next time you may lose even more...".

Ok, back to the 60-day chart I may say that all three indexes S&P 500, Dow(30) and Nasdaq 100 have almost similar sentiment on all technical indicators:

• SBV - Bullish - The SBV is moving up;
• MVO - Bullish - the last high volume surge is red - during the price decline;
• Advance-Decline Issues Oscillator - Bullish - The AD Oscillator is on up-side;
• RSI and Stochastics - Bullish - The RSI and Stochastics are above70 and 80 levels respectively;
• MACD- Bullish - The MACD is advancing;
• McClellan Oscillator - Bullish - The McClellan Oscillator is on its way up.

Chart 1: DJI 60-day chart with elements of technical analysis

S&P 500

In my last "New Highs/Lows" post on August 12, 2008 I have reviewed my longer term outlook based on technical analysis of 1-year index charts with mentioning that over the shorter term I see oversold levels on Nasdaq 100, S&P 500 and DJI indexes - we saw a dive on the market on August 13 with some recovery by the end of the week.

In majority cases the reversal point after down trend (support) is very sharp and sudden. In opposite a reversal point after uptrend (resistance) is not as volatile and as a rule spread over the time when we may see almost flat market. We had up-move after August 1st and then some decline with Flat market after August 11th.  Now, my shorter-term main question is "Does the market released the oversold pressure over the last week and now it's ready for go further up? or the stock market levelled the indexes before deeper slide?". Keep in mind that I'm referring to the shorter-term trends. My longer-term technical analysis is basically unchanged and I still in Bullish mood and believe in higher odds to see the indexes higher than they are today (refer to my 1-year technical analysis in my "New Highs/Lows" post on August 12, 2008 and my "DJI" post on July 20, 2008).

Chart 1: 60-day S&P 500 Chart technical indicators

From the chart above I may see that my S&P 500 technical indicators are bullish, yet, some of them close to become bearish:

• SBV - Bullish - The SBV moves up pointing to the positive sentiment;
• MVO - Bearish - The MVO shows high volume surges during the recovery in the period from July 22, 2008. Each time after such volume surge we saw small correction, however, we did not see high volume surges during these corrections (absence of red MVO). From one side it tells us that high volume surge during the up-move is needed to push the S&P 500 index down, yet much smaller volume is needed to reverse the S&P 500 index back into up-trend and this fact confirms my longer term outlook. Yet these volume surges are making an input into moving the index into oversold levels which may push the market into stronger correction;
• Advance-Decline Issues Oscillator - Bullish/Bearish - The AD Oscillator is at high positive level, yet it started to move down by pointing to the possible beginning of the changes in the sentiment towards the declining stocks;
• RSI and Stochastics - Neutral - The RSI and Stochastics are on the edge of 70 and 80 levels respectively. Should they start to move down it may point to Bearish trend. Should they go back above their critical lines it would point to the possibility of further Bullish trend;
• MACD- Neutral - The MACD is flat and basically neutral;
• McClellan Oscillator - Bullish - The McClellan Oscillator is on its way up and is Bullish at this point of time.

The DJI 60-day chart looks similar to the S&P 500 chart above. Yet, the Nasdaq 100 60-day technical analysis is more negative by pointing to the higher odds of a possible slide into correction. For the Nasdaq 100:

• SBV - Bearish - The SBV moves down;
• MVO - Bearish - The MVO shows absence of red (high volume during the price drop) and shows a lot of green (high volume during the price rise);
• Advance-Decline Issues Oscillator - Bearish - The AD Oscillator is on its way down;
• RSI and Stochastics - Bearish - The RSI and Stochastics dropped below 70 and 80 levels respectively;
• MACD- Bearish - The MACD is on the down side;
• McClellan Oscillator - Bullish - The McClellan Oscillator is on its way up, yet it is still below zero line.

Overall, by analyzing 60-day technical indicator I may say that I see the possibility of the correction down, yet, at the same time I see the possibility of the scenario when the market can ignore the Nasdaq 100 bearish indicators and move up under the pressure of the Bullish parent longer-term trend. I would say that for me, the shorter term trend is undefined at the current moment and one of the conservative strategies in such situation could be staying in cash until I see the Nasdaq 100 become bullish or the S&P 500 and DJI more bearish.

Technical Analysis - New Highs and New Lows

As I mentioned several times I believe that it is important to understand the nature of the technical studies in order to properly use them in technical analysis. Use of indicators without understanding the principles that move them may lead into situations when a trader starts to blame an indicator for fake signals.

New Highs & Lows indicators are from the group of Breadth indicators and they represent the number of all stocks reaching the new 52-week highs or lows. These indicators are applied to the indexes and exchanges only (to the basket of stocks) - they cannot be applied to an individual stock.

Initially the New High/Lows indicators were applied to the New York Stock Exchange (NYSE). Now many traders started to apply it to the S&P 500 index which is well known as one of the best indexes reflecting stock market sentiment.

So what does New Highs and New Lows show?

I would set 4 basic principles behind these indicators which summarize my understanding of the New Highs and New Lows based technical studies:

1. When we see that the number of new highs increases and the number of new lows decreases during the price advance we have to understand that the bullish sentiment is dominant on the market. Basically we see that the number of stocks making new highs (moving up) increases and it attract investors to play up. Every day we see more and more stocks involved into uptrend and there is a possibility that the index will continue to move up.
2.  When we see that the number of new highs declines and the number of new lows raises during the price drop we have to understand that the bearish sentiment is dominant on the market. Basically we see that the number of stocks making new lows (moving down) increases and it attract investors to play down and possibility of further crash is still high.
3.  When we see that the number of new highs started to decline and number of new lows started to raise while the index price is still moves up we may tell that some stock from the index basket started to drop after being overbought and this change in the sentiment may involve other stocks into declining movement which may lead the index into the recession.
4.  When we see that the number of new lows started to decline and number of new highs started to raise while the index price is still moves down we may tell that some stock from the index basket started to advance after being oversold and this change in the sentiment may involve other stocks into a recovery process which may lead the index and majority of stocks from this index into the new up-trend.

here are 2 popular technical indicators based on the New- Highs and New Lows numbers - New Highs/Lows Oscillator and New Highs/Lows Ratio:

New High/Lows Oscillator = New Highs - New Lows

New High/Lows Ratio = (New Highs - New Lows) / (New Highs + New Lows) * 100

By applying the principles discussed above to the oscillator and ration we may say that:

1. When then the New Highs/Lows Ratio or Oscillators moves along with a price moving average (price trend) it confirms the current trend.
2.  When we start to see the divergence between the New Highs/Lows Ratio or Oscillators and price moving average it could signal about coming trend reversal.

Comparison of the New Highs/Lows to the behavior of the price moving average helps to look beneath the surface and can often warn about coming trend reversals. Yet, investors should be very careful with applying New Highs and New Lows based technical indicators to the basket with the small number of stocks. Such indexes as Dow Jones Industrials (DJI - basket of 30 stocks), Dow Jones Utilities (DJU - basket of 15 stocks) and Dow Jones Transportation (DJT - basket of 20 stocks) may lead to confusion since in majority of the cases we may see only making New Highs (New Lows = 0) or only making New Lows (New Highs = 0) stocks. To simplify the analysis and help with analysis of the small basket indexes, the moving average could be applied to the New Highs/Lows based technical studies.

Another point is that an investor (trader) should understand that New Highs/Lows indicators are based on the daily data and it could be difficult to use them on the intraday level. It would be logical to use them on charts where 1 bar equal at least to 1 day - lower timeframes become less informative.

New Highs/Lows

I missed my weekly post and I do it now. There were not a lot of changes in the sentiment on the market and my bullish technical indications described in my "Short-Term Technical Analysis" on August 5, 2008 post pushed all the indexes (including the Nasdaq 100, S&P and DJI) higher.

Now, looking on the past week you may see that short-term trading strategy based on the longer-term technical analysis could be successfully used if this technical analysis is correct (see my "Simple Trading Strategy" post).

Going back to my longer 1-year charts I do not see any changes in the bullish sentiment. So far, all indicators point to the good odds that we may see the stock market higher.



This time I have added New Highs/Lows Ratio - another breadth indicator that is used in technical analysis to confirm a trend as well as to spot reversal points. The New Highs/Lows Rule tells us that when we see increasing number of stocks that are making new 52-weeks highs (New Highs/Lows Ratio is increasing) we have confirmation of the up-trend and when we see that this number starts to decrease we should be worried about possible changes in the market sentiment and trend. So far, this indicator is bullish as well.

I think a trader should not be afraid to use several technical indicators. The more indicators are used the more informed trading decision could be made. Of course, with many indicators there could be situations when they all point in different directions and some traders could be confused and even desperate by this. I would say in this situation "Stop trading, take a few days vacation until you see a clear picture again". I consider professional traders those traders who knows when to trade and when to stay in cash and who can stay in cash long enough do not make a wrong step.

So, my longer term technical analysis shows me that the stock market still has room for further recovery. Yet, when you look at longer-term chart I would recommend comparing different indices - you may notice that the Nasdaq 100 index is not as oversold as S&P 500 and DJI indexes (see my previous post), on the other hand the Nasdaq 100 does not include financial companies...

Even if my longer-term charts point towards up-trend it does not mean that tomorrow we will see rising market. For tomorrow outlook, when I analyze 60-day chart I see that the indexes are oversold in short term. We already had first day of decline today and it would be nice before making any assumption on what I wrote to take a look at smaller time frames.

Simple Trading Strategy

Nice day. What can I say, see my last "Short-term Technical Analysis" post. Pressure of the longer-term oversold levels pushed the market strongly higher. Today, shortly after the market open all short term technical indicators were extremely bullish and the stock market (all indexes - DJI, Nasdaq 100, S&P 500 and other) recovered in the strong rally.

There is a golden rule "never play against a trend", yet, I have never seen anyone who would explain what does it mean and how it could be used on practice. In my understanding this rule could be used in building a simple trading strategy: ignore signals generated by shorter term indicators if they suggest to trade against the longer term indicators and trade only those shorter term signals which go along with longer term technical indicators.

If based on the technical analysis of 1-year chart a trader have made an assumption that this chart suggest that the market is heavily oversold, then this trader may say that all signals generated by the 60-day chart (shorter term chart) to open a short trade (signals to sell short) should be ignored, while any bullish indication (signals to buy) on the 60-day chart could be used to open a long position. This is my interpretation of the "never play against a trend" rule.

I could be wrong, yet I do not understand those traders who build their trading systems based on one timeframe only. For me it's walking in the "dark room". That is why I analyze several timeframes simultaneously.

Short-term Technical Analysis

Last week in my "S&P 500 post" based on the 60-day technical analysis I have mentioned that the stock market has potential for further slide, yet, not a deep one. The market continued to drop on Monday July 28, 2008 and on Tuesday it is already started its recovery movement.

Now, again by looking at the 60-day chart I am not very optimistic. Again the same as on the last week I may see that over the shorter term I see more overbought indicators that may push the market lower to retest the July 15, 2008 lows. All three major US indices - DJI, Nasdaq 100 and S&P 500 - the 60-day index charts show me that

• SBV oscillator declines,
• McClellan Oscillator declines,
• Advance-decline oscillator declines
• we have high positive MVO on July 23rd and July 30th with absence of the Negative MVO
• Stochastics is below 20

On the other hand I see some positive movement in the MACD and RSI started to advance.

In summary, over the shorter term, the high positive MVO shows that there is a possibility of a slide and now overbought levels are stronger than we had last week.

However, the longer-term charts (1-year charts) still indicate high oversold levels for the S&P 500 and DOW(30) indexes (the Nasdaq 100 companies are not as oversold as the rest of the market). The only negative sign on this chart I see is the fact that the SBV oscillator started to decline.

So, what it is going to be? Will the market slide based on the 60-day technical analysis, or will it ignore shorter term technical indicators and will run higher based on the 1-year oversold levels?

I would put it in the following form: yes, I think the during June - July stock market crash we saw very strong volume surges which indicate extremely panic selling and which tell me that in that period some part of investor (who has enough funds to satisfy the panic selling demands during the crash) were buying. Based on this, I would assume that even if the market slide down towards the July lows, it still has a potential to be higher than it  is today simply because those traders who wanted to sell already sold in panic during the June - July. The ideal picture that I would like to see is a slide with the high volume (low negative MVO) and then strong reversal. Yet, I still consider a possibility that shorter term oversold levels could be ignored and the market can move higher.

I'm sorry, I do not present a chart today. You may check the chart by yourself. As a reference, you may see the 60-day chart setting I use in my last week post and my 1-year chart settings in my DJI post.

S&P 500

On July 21, 2008 in my "Short Technical Analysis" post I highlighted the possibility of the drop down after the strong recovery we saw after July 15, 2008. In a day, on July 23rd the market started to drop and continued its slide by the end of the week.

The question that I would put is "will the market continue its drop lower to retest the most recent lows?"

To answer this question I look at my 60-day chart to see what the recent volume balance and the sentiment on other technical studies. It is worth mentioning that the Nasdaq 100 spent last week differently than the S&P 500 and DJI indexes. As a result the picture on the Nasdaq 100 chart differs from the S&P 500 and DOW(30) charts. While the S&P and Dow Jones index point to the higher odds of the further drop, the Nasdaq 100 index does not look as pessimistic.

Below you may see the S&P 500 60-day chart.


Overall, the technical analysis on the chart above shows the danger of the further market crash:
1. The SBV oscillator is on its way down and indicates the negative sentiment.
2. High MVO on July 23, 2008 reveals that we had strong volume during the price up-move which pushed the stock market into the short-term oversold stage at least. There is no doubt that this volume surge has a power to push the market lower and we already did face 3-day stock market crash.
3. The Advance/Decline oscillator moves up and it is actually a good sign - a sign in the favor of a recovery.
4. Both RSI and Stochastics have dropped below their critical bearish levels. They point to the negative stock market sentiment.
5. McClellan Oscillator is more or less neutral with some potential to the bear market.
6. Despite the 3-day drop down the VIX volatility index is almost flat and is neutral as well.

Again, the about points are related to the S&P 500 and Dow Jones Industrial indexes, the Nasdaq 100 index is less negative and I would even assume may push the market higher.

Yes, overall technical analysis based on the 60-day chart reveals higher odds of the further slide. Yet, personally, I would not play short, since looking on the 1-year chart (see my July 20th DJI post) I see that the market is heavily oversold in the mid-term.  Based on a yearly chart I do not believe that the recent slide may continue very deep down, I would more closely look at the 60-day technical indicators with expectation on a strong reversal. Yet, I could be wrong - my technical analysis is not 100% perfect...

Short Technical Analysis

Yesterday in my "DJI" post I have described 3 possible ways of a further trend developing over the short-term. I stated that personally I believed in higher possibly of the third scenario by which the stock market after a flat move may react on the high volume surges generated on July 17-18, 2008 and start to move down in order to retest the most recent lows (July 15 lows) - today we faced relatively flat market and it confirms my statement. Those high volume surges during the price advance did halted and stopped the recovery.

Again, I have repeat myself, my strong opinion is that the chart should be analyzed on daily basis. By monitoring the 60-day chart, today, on all three indexes (DJI, Nasdaq 100 and S&P 500) I see that McClellan Oscillator moved even lower down into negative territory by overcrossing zero line. Stochastics and RSI started to move down and dropped below 80 and 70 levels respectively. SBV started to decline as well. All of that tell me that most likely I may see further development of the third scenario and now I consider that the odds are on a move down.

I do not know know how deep the market may drop (if it's going to drop at all) - it could crash only a few points or it could run to July 15 lows and even lower. If the indexes move down, I would expect to see high volume again. Then, depending on a magnitude of that volume it would be easier to judge when we may see reversal. That's why I have one recommendation only: "Do your homework" - analyze charts on the daily basis.

Of course my technical analysis could be wrong and market still may ignore July 17-18 high volume and continue to move up.

My view on the 1-year chart is still the same as before (see my previous posts).

DJI

We had very nice move up this week. In spite of negative media pressure who threatened us that another 90 financial banks more likely will follow IndyMac path, the Dow Jones Industrial index is 6.2%, the S&P 500 and the Nasdaq 100 indexes are 3.5% up from the July 15, 2008 lows. Already on July 8, 2008 in my "Stock Market Crash" post I highlighted that the market is heavily oversold and we may face the strong and fast recovery movement. However, the market moved lover and on July 14, 2008 in my "Charts Technical Analysis" post I did take a look at 1-yer charts to confirm my expectation on the market recovery. I stated that the stock market is heavily oversold and that even if the market intends to drop further down, before, it need to release the oversold pressure in the recovery movement. I pointed that the Nasdaq 100 is not as oversold as the S&P 500 and DJI indexes and we saw the Nasdaq 100 behind the other indexes rally up.

I always mention about importance of the monitoring the charts during the trading hours. By looking back on the 60-day index charts we may see that on July 14, 2008 the Advance/Decline Oscillator started to advance by pointing to the shift in the market sentiment. On the same day the SBV oscillator started to advance indicating the possibility of the recovery. Shortly after the market open on July 16, 2008 the MVO become equal to zero and McClellan Oscillator overcrossed zero line by confirming the bullish sentiment. So, I do not think that those traders who follow charts are surprised by this recovery.

Now, looking forward, we have the same question - what's next? Will the DJI and the S&P 500 indexes follow the Nasdaq 100 drop on Friday or will the recent recovery continue? I would put this question in other way - did the recent recovery release the longer-term oversold power at least partially in order to resume the down-trend? and I would put other question - looking on the recent week, did the market become oversold in the shorter term?

To answer on the first question I have to look at my 1-year chart (the chart I mentioned in my "Stock Market Crash" post).



The technical analysis applied to the yearly charts tells me that the stock market is still heavily oversold:

1. SBV is still negative and still moves up;
2.  I see only red MVO (no green MVO - no volume surges to the price up-side);
3.  Stochastics only started to move up;
4. VIX volatility index only started to decline and still is above 20;
5. MACD is not even crossed zero line on its move up from the negative area.

All the technical indicators above point to the beginning of the development of the recovery and high possibility of further up-move. The 1-year chart definitely does not show any release of oversold power and it does not show that the market has become overbought during the recent week recovery. Based on this chart I would assume that we may see further move up.

To answer the second question I have to look at my 60-day index charts and see what my technical analysis tells me about shorter time-frame. Since the Dow Jones Index has made the strongest up-move I have emphasize my attention on that index.


From the chart above we may see that the 60-day DJI technical analysis overall is positive and points to the possibility of the further up-move:

•  the SBV is still very high - could be premature to talk about changes in the bullish sentiment;
•  the Stochastics and RSI are above 80 and 70 levels respectively by pointing to the bullish sentiment as well;
• VIX volatility index is moving down, away from its July 15, 2008 high when it run above 30.
• McClellan oscillator started to move down, yet, it is still far above zero line and it could be premature to talk abbot reversal based on this technical indicator.

The only negative fact I see on the DJI chart is high volume surges during the index run up on July 17-18, 2008 (see green MVO). There is a high possibility that this high volume pushed the indexes into short-term overbought territory and the fact that MACD and McClellan oscillator started to move down shows the possibility of the market reaction on that volume. The technical studies on the S&P 500 index chart looks almost the same as on the DJI chart, yet the 60-day Nasdaq 100 chart has less positive and more negative points.

Again, I would bring up 3 possible scenarios of the further development:

Scenario #1: Stock market reacts on July 17-18 high volume and drop down - in this case it can drop lower the July 15 lows.

Scenario #2: The stock market continues to move up by ignoring the July 17-18 high volume. The market is at high oversold levels and it has power to continue the rally.  That would tell me that this high volume was generated not by buyers but sellers who considered this small recovery as a good point to sell short. In this case I would tell that, most likely, those sellers pushed the market even into stronger oversold stage and we may see even stronger recovery.

Scenario #3: The July 17-18 high volume slows down the advance and the stock market continue to move up or sideway with further retesting of the most recent lows and collecting more downside volume before final reversal.

Personally, I would stuck with the scenario #3, simply because I already see some changes in the McClellan, MACD. In addition the Nasdaq 100 is not as oversold as the other indexes. Yet, I could be wrong and may only recommend to monitor and analyze charts.

Financial Sector

IndyMac is down, yet the stock market (Nasdaq 100, S&P 500 and DJI indexes less then 1% down only). On the day when Bear Fund was down the US indexes crushed almost 4%. It looks like this collapse did not generated panic selling or maybe there are not a lot of traders who is willing to place short order (create selling demand) – who wanted to sell already sold and now is in short position. So, for how long will the financial sector try to push the market lower?

Charts Technical Analysis

Another, crazy week is behind. We saw strong slides and we saw strong recoveries. The feeling that the stock market is manipulated was following me the whole week - the indexes declined even when the majority of stocks were in advance - on one day we had a news on Government attempt to give a help to financial institution on the next day we hear that these institution do not need such help. How many else surprises wait for us?

Overall, despite all negative pressure, all negative news the Nasdaq 100 index slide down only 5 points (0.3%) over the week. Keep in mind that the Nasdaq 100 index is a basket of 100 non financial companies and as a result less affected by the financial sector than the S&P 500 index and DJI index. As a result of the week the DOW index lost 188 points (1.7%) and the S&P 500 index lost 23 points (1.9%).

The question is what will the next week bring to us? Will the financial companies be able to push the stock market deeper down despite the heavily oversold stage? We saw such attempts during this week, yet we saw that the rest non financial part of the stock market tried to move the market up (we witnessed a few attempts of strong recoveries).

Last week (see my previous "Stock Market Crash" post), based on the technical analysis of the 60-day chart I have made an assumption about a possibility of the strong recovery. Yet, the market is still down. Intraday market crashes, when the Nasdaq 100 index dropped for 3% (on Friday July 10), made traders to believe that the market was going to crush even more, and I think not a lot of traders accepted the same strong recovery later on the same day as a sign of the oversold market. I think that majority of traders still believe that the market will go further down and they do not dream even about a small recovery. Maybe they are right, maybe the stock market will be lower, yet I do not think that it’s going to be "tomorrow". As I mentioned before, I see the extremely high oversold levels and on my opinion we are on an edge of a strong recovery. Even if the market tends to be lower, before, I believe it has to release some oversold power in a recovery movement.

If we compare the October 2007 – January 2008 stock market crash, with current May - July 2008 down trend we will see different price behaviors. If during the Oct-Jan crash when the indexes dropped for 2% then in majority cases they continued to drop even further. However, during the current down trend very often we witness the scenario when the indexes dropped down for 2-3% and then they moved up in strong recovery within a single session (especially over the last two weeks). It tells me that the market is driven down by a few negative companies (like Fannie and Freddie) while the rest of the market tries to recover from the heavily oversold levels. That is why I have put a question above for how long the financial companies are able to push the stock market deeper down despite the heavily oversold stage.

In order to review my position about the current market, this week, I decided to take a look at yearly index charts to see the longer term tendency of the stock market.

Chart #1: Dow Jones Industrial Index (DJI) 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)



Chart #2: S&P 500 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)
 

Chart #2: Nasdaq 100 Index 1 year chart - SBV(10), MACD(20,40,20), Stochastics(20,2), MVO(5,25,3)


Personally, looking at technical analysis of 1-year chart I would consider it risky to play short at this point of time.

Stock Market Crash?

My yesterday's and today's post look like exception from the rule. I do not usually make any comments in my blog during the week. Yet, I do it now because of the changes we see in the stock market and I need to put my thoughts in the correct order. Writing down a few points usually helps me with it and keeps away my emotion from my technical analysis.

In my "Nasdaq 100 is Behind" post on July 1, 2008 I described two possible scenarios on my opinion of the coming reversal. Over the past week we saw developing of the second scenario where the Nasdaq 100 pushed indexes lower. I mentioned that in any cases I would watch for high volume surges that may indicate the end of the downtrend and possibility of a reversal. Yesterday, in the "Advance Decline" post I have pointed on the interesting Advance/Decline behavior and high volume surges. I do not think that today's strong and sharp recovery should be a surprise.

I believe, the main question for me now is to consider if today's strong up-move is a beginning of the recovery or it is just volatile market before further slide...

By looking at my favorite 60-day charts (which I use to analyze 2-10 days trends), after today's rally I may say that all my technical indicators are bullish and point to the higher possibility of the further development of the recovery:
- SBV started to move up;
- I see big number of volume surges during the recent decline;
- McClellan Oscillator is on the up-side;
- Stochastics and RSI bullish as well;
- Advances and Declines points to up-trend;
- VIX Volatility index dropped down.

What I like is that all the indexes (Nasdaq 100, S&P 500 and DJI) show similar bullish sentiment on all technical indicators. Basically, my technical analysis points the higher odds of up-trend.

Yet, there is two things that makes me worry and which will press me to monitor charts more closely:
1. Today's rally was on the high volume which may push the stock market down again.
2. It's a rare situation when the market make a reversal from the down-trend without at least second attempt to hit the bottom.

Basically, I see 3 scenarios of the possible further development:

Scenario #1: Stock market reacts on today's volume and continue to decline. I would be very difficult for the market to do it due to the high oversold state. It's difficult to believe that today's advance relapsed all oversold power and hifted stock market into the oversold state. Personally, I would not expect to see that scenario, yet, there is always a possibility of me being wrong.

Scenario #2: The stock market continues to move up by ignoring the today's high volume during the advance. The market is at high oversold levels and it has power to continue the rally.

Scenario #3: The today's' volume slows down the advance and the stock market continue to move up and then side way with further drop and retesting of the most recent lows and collecting more volume before final reversal.

I believe the next few trading session will more reveal the intends of the market. It would be nice to see drop in the trading volume as a confirmation of the recovery.

Advance Decline

As a rule I do not make any posts during the week. Yet, today I witness interesting situation. S&P 500 advance decline oscillator and ratio were not as negative as it supposed to be during such index slide. The same was in the DOW sector.

Very nice volume in the middle of today’s trading session and very nice recovery right after that…

It was funny to read financial news today. Over the last few months the news tried to put in the head of investors the fact that the market moves down because of high oil prices. Today, when the oil was down and market was down – the media has found another explanation to the market slide and surprise – IT WAS NOT OIL. Maybe at the end the high oil price is not a reason of the market down move? Or maybe we should \never trust media and never based our trades on the media analysis of the stock market.

Technical Analysis - Volume Oscillator

VO (Volume Oscillator) is one of the basic volume based indicators used in technical analysis. Such indicators as MVO (MarketVolume Oscillator) and PVO (Percentage Volume Oscillator) are based on the Volume Oscillator and it could be useful to understand the physics behind the Volume Oscillator in order to understand the other volume based technical indicators.

The Volume Oscillator formula is very simple and it is based on two volume moving averages (VMAs):

Volume Oscillator = [Fast VMA] / [Slow VMA]
Fast VMA is shorter-term VMA
Slow VMA is longer-term VMA

From the formula above we may see that the Volume Oscillator show the difference (ratio) between two volume moving averages. Volume moving average is average volume over a specified period of bars. If we set Fast VMA bar period equal 1 and Slow VMA period to 10 then on the daily chart (1bar = 1 day) the Volume oscillator will show how big or small is the current volume bar in relation to the average volume over the last 10 days.

The definition of the Volume oscillator could sound like: "The Volume oscillator shows where the current volume is in relation to the average volume over a longer period of time."

The Volume Oscillator becomes very useful in analysis of the volume surges because it gives mathematical evaluation of the volume surge in relation to the average volume over a longer period of time. That helps to use the mathematical representation of a volume surge in a developing of a trading system or building a trading strategy.

Volume Oscillator is very similar to the PVO (Percentage Volume Oscillator). These two technical indicators basically have the same meaning with the only difference that PVO evaluates volume surge in percentages while Volume Oscillator represents the magnitude of a volume surge as absolute value.

It is common practice to use several indicators in technical analysis. By joining Volume Oscillator with price technical indicators we may separate volume surges (when VO > 1) during the price move down from volume surges during the price move up. The high Volume Oscillator assumes abnormal volume activity and we may classify the volume surge during the price decline as panic selling and volume surge during the price advance as greedy buying:

• When VO is above 1 and the price of a stock declines it indicates that this decline generates bigger than normal volume over the longer period of time. We have abnormal volume – more traders are in the game – a stock decline generates panic selling. The higher volume oscillator value is during a price decline the stronger panic selling we have on the market;
•  When VO is above 1 and the price of a stock advances, it indicates that this advance generates bigger than normal volume over a longer period of time. We have abnormal volume – more traders are in the game – a stock advance generates greedy buying. The higher the volume oscillator value is during a price advance the greedier buying we see on the market.

Keep in mind that the volume is always a two sided transaction. Volume = 1 means that we have 1 buyer and 1 seller. When we have high volume surge during the price declines it does not only mean that we have panic selling, that also means that we have somebody who satisfies demands of the panic sellers and that could lead to the changes in the supply/demand balance and as a result we may expect a trend reversal.

The similar logic could be applied to the volume surge during a security price advance. The price of a stock moves up when we have more buyers than sellers. At the moment when we see big volume surge during the price move up we may say that some sellers decided to satisfy the big number of buyers which may lead to the luck of buyers (buying power for further up-move). The bigger a volume surge is during the stock price rise - the bigger number of satisfied buyers do not place trading orders any more (all funds already invested). As a rule that leads to shift in supply/demands balance, reduced number of buyers and as result we may see correction down or even market crash.

The difference between greedy buying and panic selling is that the greedy buying could be spread over time while the panic selling as a rule is a short lived process and that’s why we have bigger and stronger volume surges at the support points than at the resistance levels.

technical analysis has dozens of the various technical indicators in its arsenal. On my opinion, before using any of the technical studies, it is important to spend time and learn about it as much as possible. Only then a trader may analyze mistakes (lost trades) and  only then a trader may correctly adjust a technical indicator to the current market conditions.

Index Technical Analysis

The past week the Nasdaq 100 pushed the stock market deeper down, while the DJI and S&P 500 indexes struggled to recover from the oversold levels (one of the scenarios mentioned in my previous "Nasdaq 100 is behind" post).

If I take a look at my standard chart setting I still see mixed picture:

• The DJI index shows strongly oversold levels. McClellan Oscillator, MVO, RSI Stochastics and other technical indicators on the 60-day chart point to the higher probability of a recovery. As we saw that during the last two trading session the attempts of the Dow Jones Industrials to start a recovery.
•  Taking look at the same 60-day technical indicators applied to the S&P 500 index I see that on one side McClellan Oscillator, RSI and Stochastics points to the recovery and on the other hand the SBV still decline and MVO is still below zero line. Yet, the S&P 500 the same as DJI is heavily oversold.
•  The Nasdaq 100 index is less oversold than DOW and S&P. The SBV still declines and MVO is still below zero by pointing on the possibility of the further slide. The Stochastics is still negative while the RSI is positive. The McClellan oscillator is almost flat, yet, I may say could be considered positive as well.

As I see from my 60-day index technical analysis the market is still mixed and in spite of the oversold Dow Jones and SP the Nasdaq 100 still has room to push market lower.

If I look at 1.5-year chart I see very nice, very huge volume during the index slide in the S&P 500 and DJI sectors. These volume surges are heavier than those that reversed the stock market in March 2008. Based on these volume surges I would say that we could be on the edge of the recovery. On the other hand, the same 1.5-year Nasdaq 100 chart shows almost flat volume during the Nasdaq 100 slide.

So, what I would expect from the market…. Personally I would bet more on the recovery than on the further market drop. Even if we are in the long-term stock market crash, on my opinion the market has to make at least a correction and move up before dropping further down.

If you read my blog, please, keep in mind, that I analyze 1.5-year and 60-day chart not to define mid- or long-term trend. I need more this technical analysis to adjust my short-term trading system to the odds of the general market trend.

Nasdaq 100 is behind

No post past weekend – went surfing...

Has to be very short… Trying to post during my major work...

Can say one thing – I’m watching out for volume… I see strong volume during the index drop in DJI and S&P 500 sectors and I consider that Dow Jones Industrials and S&P 500 indexes are heavily oversold. Yet, they are oversold not as strong as in January 2008, however, stronger than in March 2008. The NASDAQ 100 index is quite behind. It slid down without generating the big volume surges. While DOW (30) broke its January and March 2008 lows and S&P 500 came close to the March 2008 low by breaking the January 2008 low, the NASDAQ 100 index is still far above its low levels – no wonder we do not see the panic selling in the hi-tech sector.

What do I expect? – In one of the scenarios I would expect to see is a strong volume surge which would indicate the climax of the panic selling after which the market could strongly reverse its trend. In this case the stock market has to ignore the fact that the NASDAQ 100 stocks are not as oversold as the rest of the market. Another scenario I see is that the NASDAQ 100 may start to push the market down by trying to catch other indexes in the current crush. In the second scenario I would expect to see high volume which would indicate the climax of the panic selling as well.

That is why I am watching volume now...

Simple Technical Analysis

Sorry - no chart today. I just would lie to add a few words to my previous post. Last week I pointed to the bullish indicators and possibility of the further development of the up-move. Yet, the same technical indicators started to change its sentiment already on Monday and on Tuesday all of them was bearish and pointed to the down market. As I mentioned already several times: the technical analysis is a constant process and it's recommended to monitor charts constantly to be able to react on the market changes in time.

By following my charts (the same technical studies as always) I may say that now I see begining of changes in the market sentiment away from strongly bearish: I see nice big volume surges during the price drop which may push the indexes higher, the SBV stopped its decline, McClellan moves up and it looks like it on its way to cross zero line, RSI moves up...

So, let's see what the next week will bring us...

SP 500 chart again

In the previous "S&P 500" post I've talk about mini-version of the October 2007 - March 2008 stock market crash. At the end of this week I may say that I saw further development of this scenario: the market continued its recovery on Monday and then stock market dropped again. The question is - will the market continue following the same pattern by moving now up???

S&P 500

Nice week! Why? In the conclusion of my last "Dow Jones" post I stated "I think the market may continue to move down, at least to the point when I see the negative MVO is back to zero line and when the McClellan oscillator becomes red(negative) and starts to move up. The Nasdaq 100 is not as oversold as the DJI and this is one of the reasons why I think we may face further drop." This week I saw exactly what I expected to see, that's why I consider this week as a nice week - from the beginning of the week the Nasdaq 100 pushed the market down and it reversed exactly when MVO become zero and when the McClellan oscillator started to advance and crossed zero line around 14:00 on June 12, 2008.

When I look at the recent drop (since the middle of May) it reminds me the mini-version of the October 2007 - March 2008 stock market crash. You may see on the S&P 500 index:

One of the points that that could parallel the recent drop with October 2007 - March 2008 market crash is that both of this moves down I could split in 3 stages.

During October 2007 - March 2008 market crash:

1. The S&P 500 and DJI indexes started to move down in the middle of October while the Nasdaq 100 index continued to move up until the beginning of the November. The Nasdaq was still bullish while the rest of the market was bearish.
2. Then the whole market moved down by the middle of January. The whole market was bearish.
3. After that the S&P 500 and DJI struggled to move up while the Nasdaq 100 continued to push the stock market down by the middle of March. The Nasdaq was still bearish while the rest of the market struggled with it.

The same in the recent move down:

1. The S&P 500 and DJI indexes started to move down on May 19, 2008, yet, the Nasdaq 100 has recovered from the initial drop by making new highs on June 5, 2008. The Nasdaq was still bullish while the rest of the market was bearish.
2. Then the whole market moved down. The whole market was bearish.
3. The last week the Nasdaq 100 continued to push the stock market down while the S&P 500 and DJI were fighting against this move. The Nasdaq was still bearish while the rest of the market struggled with it.

Coming back to my charts and my technical analysis, by the end of this week I see more positive then negative factors:

• SBV moves up and for me this is a bullish sign;
• I see a lot of red MVO over the last to week which for me is a good fuel for the market up move;
• The VIX (volatility index) is moving down which would points to the bullish sentiment;
• The MACD, Stochastics, RSI and Advance decline oscillator are in the up direction - I consider it as a good sign;
• McClellan is above zero (green) - another point in favor of the bullish market.

Today I see oversold market and today I expect the further recovery. However, tomorrow the market could become heavily overbought - that's why I consider that the stock market should be monitored and analyzed constantly. It could be come overbought tomorrow or in a month... Plus, I could be wrong and if I do not monitor chart constantly I could find out about that when it's already too late...

Nasdaq 100 Stocks

The NASDAQ 100 Index comprises 100 of the largest non-financial and non investment publicly traded companies which are listed on The Nasdaq Stock Market Exchange. The Index includes domestic and international companies across major industry sectors including telecommunications, biotechnology,  retail/wholesale trade, computer hardware and software. Together with DJI (see list of DJI stocks) and S&P 500 indexes, the Nasdaq 100 index one of the most watched indexes over the world. The QQQQ (Nasdaq 100 index tracking stock) is the most actively traded ETFs (Exchange Traded Funds).

Below you may see the list of the Nasdaq 100 Stocks (companies from the index basket) as of June 14, 2008. This is an outdated listing, yet it may give you the picture of what companies are selected into the Nasdaq 100 index. For real and most recent listing I would recommend visiting the Nasdaq web site.

Ticker	Company		Index Points
ATVI	Activision, Inc.		0.15
ADBE	Adobe Systems Incorporated		1.09
AKAM	Akamai Technologies, Inc.		0.19
ALTR	Altera Corporation		0.4
AMZN	Amazon.com, Inc.		0.98
AMGN	Amgen Inc.		0.45
AMLN	Amylin Pharmaceuticals, Inc.		0.16
APOL	Apollo Group, Inc.		0.74
AAPL	Apple Inc.		1.28
AMAT	Applied Materials, Inc.		0.6
ADSK	Autodesk, Inc.		0.13
BIDU	Baidu.com, Inc.		0.35
BBBY	Bed Bath & Beyond Inc.		0.39
BIIB	Biogen Idec Inc		0.5
BRCM	Broadcom Corporation		0.25
CHRW	C.H. Robinson Worldwide, Inc.		0.17
CA	CA Inc.		0.2
CDNS	Cadence Design Systems, Inc.		0.03
CELG	Celgene Corporation		0.77
CEPH	Cephalon, Inc.		0.05
CHKP	Check Point Software Technologies Ltd.		0.3
CTAS	Cintas Corporation		0.18
CSCO	Cisco Systems, Inc.		1.02
CTXS	Citrix Systems, Inc.		0.11
CTSH	Cognizant Technology Solutions Corporation		0.39
CMCSA	Comcast Corporation		0.66
COST	Costco Wholesale Corporation		0.57
DELL	Dell Inc.		0.56
XRAY	DENTSPLY International Inc.		0.11
DISCA	Discovery Holding Co		0.1
DISH	DISH Network Corporation		0.06
EBAY	eBay Inc.		0.35
ERTS	Electronic Arts Inc.		0.37
EXPE	Expedia, Inc.		0.14
EXPD	Expeditors International of Washington, Inc.		0.08
ESRX	Express Scripts, Inc.		0.12
FAST	Fastenal Company		0.14
FISV	Fiserv, Inc.		0.04
FLEX	Flextronics International Ltd.		0.34
FMCN	Focus Media Holding Limited		0.12
FWLT	Foster Wheeler Ltd.		0.49
GRMN	Garmin Ltd.		0.07
GENZ	Genzyme Corporation		0.79
GILD	Gilead Sciences, Inc.		1.51
GOOG	Google Inc.		3.14
HANS	Hansen Natural Corporation		0.16
HSIC	Henry Schein, Inc.		0.07
HOLX	Hologic, Inc.		0.13
IACI	IAC/InterActiveCorp		0.25
INFY	Infosys Technologies Limited		0.12
INTC	Intel Corporation		1.45
INTU	Intuit Inc.		0.32
ISRG	Intuitive Surgical, Inc.		0.51
JOYG	Joy Global Inc.		0.41
JNPR	Juniper Networks, Inc.		0.15
KLAC	KLA-Tencor Corporation		0.28
LRCX	Lam Research Corporation		0.06
LAMR	Lamar Advertising Company		0.04
LEAP	Leap Wireless International, Inc.		0.2
LVLT	Level 3 Communications, Inc.		0.14
LBTYA	Liberty Global, Inc.		0.19
LINTA	Liberty Media Corporation		0.32
LLTC	Linear Technology Corporation		0.18
LOGI	Logitech International S.A.		0.2
MRVL	Marvell Technology Group, Ltd.		0.6
MCHP	Microchip Technology Incorporated		0.09
MSFT	Microsoft Corporation		3.12
MICC	Millicom International Cellular S.A.		0.61
MNST	Monster Worldwide, Inc.		0.09
NTAP	NetApp, Inc.		0.28
NIHD	NII Holdings, Inc.		0.49
NVDA	NVIDIA Corporation		0.04
ORCL	Oracle Corporation		1.93
PCAR	PACCAR Inc.		0.9
PDCO	Patterson Companies Inc.		0.03
PAYX	Paychex, Inc.		0.32
PETM	PETsMART, Inc.		0.05
QCOM	QUALCOMM Incorporated		2.3
RIMM	Research in Motion Limited		2.22
RYAAY	Ryanair Holdings plc		0.33
SNDK	SanDisk Corporation		0.08
SHLD	Sears Holdings Corporation		0.36
SIAL	Sigma-Aldrich Corporation		0.17
SIRI	Sirius Satellite Radio Inc.		0.26
SPLS	Staples, Inc.		0.3
SBUX	Starbucks Corporation		0.41
STLD	Steel Dynamics, Inc.		0.62
SRCL	Stericycle, Inc.		0.16
JAVA	Sun Microsystems, Inc.		0.12
SYMC	Symantec Corporation		0.28
TEVA	Teva Pharmaceutical Industries Limited		0.17
DTV	The DIRECTV Group, Inc.		0.55
UAUA	UAL Corporation		0.08
VRSN	VeriSign, Inc.		0.2
VRTX	Vertex Pharmaceuticals Incorporated		0.25
VMED	Virgin Media Inc.		0.28
WFMI	Whole Foods Market, Inc.		0.07
WYNN	Wynn Resorts, Limited		0.46
XLNX	Xilinx, Inc.		0.63
YHOO	Yahoo! Inc.		0.04