Bailout on Holliday - Stock Market is happy.

As I expected yesterday today we had very nice day on the stock market - more than half of the yesterday crash is recovered. Is it "Because the government is on holidays…" and nobody is messing with market and the stock market is doing what it supposed to do - to recover from the strongly oversold levels. Today's recovery witnesses one more time that yesterday crash was nothing more like political game to scare and press "them" to vote in favor of bailout. They still will be on holiday tomorrow... Does it mean that tomorrow is going to be nice day as well??? If yes, then maybe we have to send them for longer holiday...

Bailout

As I stated yesterday "I have feeling that it would be much better if they did not even announced the bailout than announced it and then started to play political games around it..." - today we had clear political crash. I bet a lot of traders were just looking with smile on this 1-day stock market crash followed by games in the government.

The fact that today’s crash was on light volume tell me that majority of traders are already out of the game, watching the CNN movie called "Breaking News" and just waitinng...

I think tomorrow is going to be a nice day, you know why? Because the government is on holidays…

DJI Chart

Despite my bullish last week outlook (see the "DJI" post on September 22nd, 2008) on the stock market we had the attempt to retest the September 18, 2008 lows. Yet, the market did not hit the bottom, in opposite the DJI (Dow Jones Industrials) recovered half of the weekly decline during the last two trading session. Sometimes I have feeling that it would be much better if they did not even announced the bailout than announced it and then started to play political games around it....

During the past week we had strong decline. Because of that I decided to take a look at longer 1-year chart to see if the results of my previous technical analysis are correct.


From the DOW(30) chart above we may see that the magnitude of the volume during the stock market crash is very big. I have already mentioned in my "DJI Volume" post about my understanding of such huge volume. For me it's indication of the strong panic selling that lead the stock market into strongly oversold stage. If you may try to question it on the 60-day chart by pointing that September 19th rally up has released this oversold power, the 1-year chart make me believe that we did not even see the begging of the market reaction on that huge sell off:

• The volume is still very high, which indicates we still have panic and uncertainty in the market. Yes, the last week daily volume is lower than the daily volume we saw in period from September 12 until September 19, yet it still far above the average daily volume over the past year.
  
  - The fact that the volume is down tells me that the moment of worst fear is over and there are not as many sellers as we had on September 17-18, 2008. Y
  
  - Yet, the fact that the volume is still high tells me that there are still a lot of sellers. However, as I always mention - if we see volume then somebody buying from these panic sellers and the fact that DJI is about 5% up from the September 18th low tells that the power of these buyers is bigger...
• The same with VIX (Volatility index) - it hit the top on September 18 and now it's down and moving flat. It does not move up any more which is good sign. VIX still at high level which indicates highly oversold market. We did not see the VIX moving down which confirms we did not have yet the recovery reaction on the oversold market.
• MVO is red. We do not see green MVO. That means that we had high volume surges during the price decline (panic selling) and we did not have yet high volume during the price advance (greedy buying).
• Low SBV indicates negative money flow. Yet it declines which suggest weak market, however very low levels suggest possibility of very strong recovery.
• MACD and Stochastics are in the recovery direction.

Overall, my 1-year technical analysis is bullish (in spite the last week 3-day decline) with exception of the SBV that could be considered bearish due its decline. I would still stay on my point highlighted in my last week post that I expect to see the recovery.

DJI

Ok, as I mentioned in my last "Index Volume" post on September 16, 2008 we had it - sharp and strong recovery. Just in 1.5 trading session (from noon of September 18, 2008) the Dow Jones Industrials run up about 1000 points!!! I expected to see the indexes at September 12 levels and they (DJI, Nasdaq 100, S&P 500) are there.  I've already pointed to the meaning of the huge volume during the price slide in my "DJI Volume" with bringing to attention (in the "S&P 500" post) similar occurrences of the high volume surges in the past and the price reaction on such huge number of transaction.

I do not think there were a lot of traders who was able to open a long position over the last 1.5 trading session. I believe many traders under the media negative pressure were still trying to play short by using this recovery as a possibility to open a short position and then desperately were monitoring and thinking why the market does not go down with all these bad news... I've already mentioned my "friendly" feeling to the media "I do not trust them!!!" - They always look right by explaining the stock market after the fact. When oil goes up and the DJI drops they tell us that the investors are disappointed by high oil prices and on the next day when oil drops and you expect that investors should be happy you see another day of the DJI slide and guess what, again media is right by explaining you that investors were disappointed by bad situation in financial sector...

As I already said I'm ready to pay for a year of service that provides the volume for indexes in order to have just one such beautiful moment. With volume indicators I have fun by watching the news and their explanation of the market. Stock market is not as it was 10-20 years ago. Look at the NYSE volume 10 years ago - we have now much more speculators in the market and it cannot be ignored... 

The market is always described by price and volume and using technical analysis based on the price indicators only I consider as watching a TV with half of the screen covered. The same with volume I believe it's wrong to base the technical analysis solely on volume. There should always be at least one price based and one volume based technical indicator in any trading strategy, which one should be main and which one confirming it's another point. Only analysis of price movement together with volume flow may give the clear picture of the stock market processes.

So, we see the DJI, Nasdaq 100, S&P 500 and other indexes above the September 12th levels and the question is now "Will it run further to the August 28 and August 11, 2008 highs?"


By looking at the chart above I may say that we have great deal of the volume accumulated during the recent stock market crash, I believe that the market is still heavily oversold and it was not released from this oversold stage over 2 nights (since Thursday) it still has power to run up and so far all the technical indicators I use are positive:

• SBV is on its way up
• MVO show big oversold power
• Advance-Decline is rising
• RSI is rising to the 70
• Stochastics is above 80
• McClellan Oscillator is rising

Mainly based on the MVO I would assume that the odds are very good to see the indexes at August 11, 2008 highs.

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...

DJI Volume

The record volume in the history DJI and S&P 500 indexes. We have not seen such big panic selling in the Dow Jones Industrial and S&P 500 sectors before. The major influence on the DJI slide was caused by American International Group, Inc. (AIG) which shares dropped down for more than 60%. I do not think we will see such strong panic selling soon.

By following my yesterday "S&P 500" post I may say that, yes, from one side I'm disappointed by such strong crash, from  other side I'm very happy to see the daily volume record in the S&P 500 and DJI sectors - it only confirms that we will see the indexes much higher than they are today and much higher than they were yesterday. Do I see a possibility of the further slide? - yes, there is still negative sentiment on the stock market. Yet, I do not expect to see other strong crashes. Now, after such big volume I would not trade short under any circumstances. Again, I'm just a regular trader, so, do follow my words, but do your own technical analysis.

S&P 500

Over the past week in several my posts ("Support" in particular) I have concentrated my attention on the extremely high volume on the stock market. These high volume surges during the recent decline are seen clearly in all indexes including S&P 500, Nasdaq 100 and DJI. I compared some volume numbers in my "Oversold" post to the historical similar occurrences of high volume surges and pointed to usual stock-market reaction on such volume.

As I already mentioned, in all cases we always saw strong up-trend movement in response to the high volume. I always associate the high volume during the price decline as panic selling which leads market into oversold stage and the extremely high volume as extremely high panic selling which leads the stock market into extremely high oversold stage.

To better explain my view of the volume surge during the decline I set a few points. Yet, before coming to them you have to understand that volume does not show how many buyers or sellers we have, volume is 2-side transaction and for each sold share we have somebody who bought it.

1. Price declines and the volume is low: Price is declining because we have more sellers than buyers and there is not enough buyers on the market to satisfy the demands of these sellers and these sellers are willing to sell at cheaper price in order to find buyers.

2. Price declines and the volume is high (we have volume surge):The panic among sellers is growing as well as greed of the traders playing short and they are pushing the market stronger down. At some moment a group of traders (we may call them smart traders, institutional traders - I call them "Big Money Bags") make a decision to satisfy demands of all sellers by buying the huge amount of shares. At this moment we see high volume surge - a huge number of shares are changing hands.

3. Next: Those who wanted to sell - sold and have nothing to sell any more. Those who have bought, do not want to sell - they just bought and they are not in the losing position, even more, they are willing to buy more at this low price (that is why I call them "Big Money Bags"). So, the market starts to climb up under the buying pressure of the "Big Money Bags".

This is my understanding of the volume surge during the price decline. Why at some point "Big Money Bags" decide to satisfy demands of the panic sellers?, what kind of information do they have? - I do not care. All I know that if some traders with big bags of money decided to satisfy the sellers by buying at cheap price they will have enough money to push stocks higher to dump them at higher price to the greedy buyers later...You may accept my vision, you may decline it. Yet, it's difficult to argue with history. The main concept of technical analysis is to compare the current event to the history and find the possible future trend.

Chart #1: S&P 500


Chart #2: S&P 500
 

Summary of the charts:

July 2007 - Strong volume surge during the price decline with recovery after
November 2007 - Strong volume surge during the price decline with recovery after
January 2008 - Strong volume surge during the price decline with recovery after
March 2008 - Strong volume surge during the price decline with recovery after
July 2008 - Strong volume surge during the price decline with recovery after

September 2008 - Strong volume surge during the price decline ... what is next?

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).

Oversold?

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

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

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

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

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

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

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

Fannie and Freddie

Nice rally up. Yes, the Nasdaq 100 was behind, yet, now all my technical indicators on the 60-day chart favor the recovery. Let's see what tomorrow will bring to us.

I always consider that results on your technical analysis, your answer depends on how you put the question. You may ask "When will the market start to follow the Nasdaq 100 and continue its downtrend?" or you may ask "When will the Nasdaq 100 go along with S&P 500 and DJI?". The first question already assumes Bearish answer and the second question expects Bullish answer. Or the question could be neutral "Why the Nasdaq 100 does not follow the rest of the market?"

Today I would like to ask another question "Why does government did bailed out Fannie Mae and Freddie Mac on this week end and not in a week or in a month? Did it happen because otherwise the stock market would crash deeper? Or did it happen because somebody wanted to own these companies while they are still cheap? Or did it happen simply because some people do not want the truth to be revealed when these companies crashed? What does government knows that you don't?"

Another interesting fact... I always pushing myself away from the politics, yet it stroked me… From The Wall Street Journal, I quote

"Sen. Obama has received $105,849 from donors tied to the companies since he ran for the senate four years ago, making him the third-largest recipient in Congress among the top 25 listed in a recent report by the Center for Responsive Politics, which examined contributions dating to 1989.
Sen. McCain wasn't listed in the report, and proponents of overhaul say lobbyists have tried unsuccessfully to win him over." from http://www.wsj.com/article/SB122083279354208543.html

Another homework question : "Do you think if Sen. Obama become the President he and his changes will protect the interests of the regular Americans or interests those who will donor more? "

Nasdaq 100

In my last "Nasdaq 100 Chart" post I have mentioned about the desire of the Nasdaq 100 index to compensate in recent decline what it missed in June-July 2008 decline. I've already emphasized in July (see "DJI" post from 07/20/2008) that the Nasdaq sector was not as oversold as S&P 500 and DJI indexes at that time. It looks like now the Nasdaq stocks decided to catch in the recent decline what was misses in July. While the S&P 500 and DJI indexes were ready for the recovery the Nasdaq 100 index was still behind. However, now (over the last week) we see strong volume surges in the Nasdaq sector. The volume during the decline indicates panic selling and high volume surges during decline indicate that some traders decided to satisfy the demands of the panic sellers by buying huge amount of shares. Keep in mind that Nasdaq 100 index has been in decline since August 16, 2008 while the S&P 500 and DJI only since September 2, 2008 (only 4 trading session).

Now After this week I see very good chances for a recovery. By looking at the 1-year index charts I may assume that the Nasdaq 100 index has become oversold as well and now all three indexes have power to move up. Yet, I could be wrong and I do not recommend following conclusions of my technical analysis. Each trader has to do his/her own homework...

Coming back to my favorite 60-day chart, I see good odds of bullish market, at least at the beginning of the coming week (for the rest of the week I would analyze the same chart during the next week).

I have selected the Nasdaq 100 chart again since (on my opinion) this index was the major engine behind the recent decline. The S&P 500 and DJI indexes technical indicators look similar. This week I decided to set a table of these three indexes which summarizes used by me technical indicators and results of my technical analysis:

	Nasdaq 100	S&P 500	DJI
SBV	Bullish - Moving up
MVO	Bullish -Big volume surges. Now, MV=0 and this is a positive sign as well	Bullish - Big volume yet not as big as in the Nasdaq 100 sector
AD Osc.	Somewhat Bullish - Moving up, yet still at low negative levels
MACD	Somewhat Bullish - Moving up, yet still at low negative levels
RSI	Bearish - Still below 30	Bullish - Just moved above 30
Stochastics	Bullish - Crossed 20 and moving up
McClellan	Somewhat Bullish - Negative and far from center line

Nasdaq 100 chart

I mentioned in my previous "Panic Selling..." post that the Nasdaq 100 index was not as oversold as S&P 500 and DJI indexes during the recent crash in July 2008 by pointing on some bearish sentiment in the Nasdaq 100 sector while the DJI and S&P were more optimistic. Over the last two session we continued to see the power pressure of the Nasdaq companies which continued to push the stock market down. The question is for how long.

The Nasdaq 100 index is most dramatic over the past couple of session and that is why I brought out the Nasdaq 100 60-day chart to see what is the tendency in the changes of this index sentiment changes. The same as before the S&P 500 is not as bearish as the Nasdaq 100 and the DOW(30), I would say, even somewhat bullish. Despite the negative Nasdaq pressure the Dow Jones managed to end today's session even with shallow gain.


Summarizing the Nasdaq 100 technical indicators on the chart above I may say that

• SBV is still bearish - moving down (neutral on S&P 500 and positive on the DJI);
• We see high volume surge during the last two trading session slide (high negative MVO) which is a good sign for possibility of the coming reversal. Yet MVO is still below zero line (the same on the S&P and DOW);
• Advance/decline oscillator is more neutral by moving close to the central line (similar on the S&P and DOW);
• MACD started to move up which would favor the reversal (S&P 500 and DJI MACD bullish as well);
• RSI is at 30. Should it drop below it would point to the possibility of the further slide. Should it move up it would indicate bullish sentiment (S&P and DOW RSI are somewhat bullish);
• Stochastics is below 20 - bearish sign (S&P and DOW Stochastics are bullish);
• McClellan Oscillator reversed and started to move up, yet it still below zero line.

So, I see some negative signs in the Nasdaq 100 index. Yet, at the same time I see some technical indicators started to change from bearish into neutral and from bearish into bullish, which could point that we could be close to the bottom. It looks like the S&P and DJI are ready to go up and they wait for the Nasdaq companies only.

Panic Selling - Oversold Levels

Starting from the middle of July (see my DJI post on July 20, 2008) I have been accepting the high volume surges during the June-July 2008 market crass as extremely high panic selling that pushed the stock market into the heavily oversold stage. As a result of this heavy oversold level we had the recovery, yet, the recovery was not as strong as I expected. It's one and half month since the market hit the bottom and because of that I pushing myself to take another look at my longer term charts to see if there are any changes in the stock market sentiment.

By analyzing the S&P 500 and DJI indexes we may see a lot of similarities, yet, the Nasdaq 100 1-year chart has completely different picture.  No wonder that over the last month we had a lot of trading session when the Nasdaq 100 index was trying to push the market in one direction while the S&P 500 and Dow Jones Industrials were struggling to run in opposite direction.

The technical indicators on the Nasdaq 100 chart (see my set of indicators in the "New Highs/Lows" post on August 12, 2008) are not very optimistic at that point of time. Because of the last two weeks, the technical analysis of the Nasdaq 100 index gives the Bearish outlook. Taking into account that in July 2008 the Nasdaq 100 companies were not as oversold as the S&P 500 and DJI stocks it make the picture for the Nasdaq 100 even more Bearish.

At the same time the S&P 500 and DJI technical analysis still points to the higher odds of the Bullish market. In addition to the technical indicators, if I start to compare the January and March 2008 S&P 500 volume surges (panic selling) with July 2008 volume I clearly see that panic selling in July was far more extreme than in January which leads me to assume that in July the stock market reach stronger oversold levels than it was in the beginning of the year. As a result of the January and March oversold levels we had strong recovery where the S&P 500 run more than 10% up. Now, when I saw several times stronger oversold levels the S&P 500 recovered only around 7%... For me it's difficult to accept that this is over and overall, I still believe that the market has more room for recovery, and my longer term mood is still bullish. Yet, the further we go from the middle of July (bottom of the stock market crash) without recovery, the more often I will be looking at the longer term charts to see if there is any changes in the market sentiment.

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...