Volatility Down

As I mentioned in my previous post ("Trading Strategy" post on September 5, 2010): "it is still difficult for me to believe in strong recovery (Yet, I could be wrong). Because of that I would not be playing long at this moment. At the same time there are no bearish signals and because of that I would not be playing short either" - the past week has gone mostly under side-way pattern with some positive bios.

By taking look at technical indicators, I may say that majority of them continue to be bullish and suggest possibility of further development of up-move. However on many technical indicators you may notice negative divergence - when price makes new high, yet an indicator does not makes new highs. Such divergence in technical analysis usually signals change in the sentiment with possible reversal in the near future.

Another point worth mentioning is that the volatility has dropped over the past week. While volatility still remains high on daily charts (1 bar = 1 day and higher time-frames), on lower time-frame charts (hourly charts and lower) we may see substantial drop in volatility. Overall this could be considered as a positive sign. At the same time sharp drop in volatility (also known as "the Squeeze") could be nicely seen on Bollinger bandwidth on hourly chart. Such Squeezes to the volatility lowest levels are usually noted before strong and sharp moves.

The third point I would like to drag your attention to is that the indexes (S&P 500, Nasdaq 100 and DJI) came close to the resistance levels seen in the middle of January 2010, in the middle of June 2010 and at the beginning of August 2010. No doubt that this level is sensitive to mid- and long-term traders and mostly their sentiment would define the further trend.

Overall, I would say that we may see some strong moves in coming days. Because of the negative divergence and overbought indications on the shorter-term charts, I would expect to see some correctional move down. Since we do not see strongly overbought indications on the longer-term charts, it is difficult to say at this point of time whether this correction (if it occurs) could grow into stronger down-move.

Trading Strategy

Last week in my "Side-Way Trading" post I mentioned about a possibility of short-term up move, yet, I was skeptical about strong up-move. It appeared to be that I was wrong. We did have a strong up-move. One more time the stock-market has proved that sooner or later everybody makes mistakes in analysis and stop-loss strategy should be used not just to cut losses but to protect profit as well.

During the last four positive sessions the indexes (Nasdaq 100, S&P 500, DJI, etc) have come close to their June's and Augusts' high levels. So far, the odds are good (from technical analysis prospective) we may see the indexes third time at those levels. Twice the stock market (indexes) has bounced down from these levels and most likely we may see slow down again.

Majority of technical indicators continue to be bullish and as I already mentioned, the technical analysis suggests that we may see the indexes moving higher. There are only two negative sings from my point of view.

First thing is high volatility level. The stock market continue to be highly volatile and this is a bearish sign. In such volatile market we could have strong down move in the same short period of time as we had the current 4-day up-run.

Second negative thing, from my point of view is that the market was not strongly oversold, yet it did make strong up-move in short period of time. It is more like some institutional investors came back from vacations, they saw stocks cheaper than a month ago and they started to buy. What is going to happen when their buying power became exhausted?

Because of these two points above, it is still difficult for me to believe in strong recovery (Yet, I could be wrong). Because of that I would not be playing long at this moment. At the same time there is no bearish signals and because of that I would not be playing short either.

One of the rules in my trading strategy is staying in cash until I see a pattern. I missed the last up-move - I did not lose money on that, I just did not make as much as I could. Still, the fact is that I missed this move and now it is better to stay in cash in order to avoid another mistake. My view on the current stock market condition is that I would expect to see indexes at their June's and Augusts' high levels. Then, depending on how those levels are hit (is they are hit) I would built further analysis.

Side-Way Trading

As I mentioned in the "S&P 500 Financial" post on August 20, 2010: "At this moment the majority of technical indicators remain to be bearish by suggesting the higher odds of further decline." - the indexes (S&P 500, Nasdaq 100 and DJI) are lower, yet if you take at the hourly chart (1 bar = 1 hour) you will see that most of the time the indexes were in side-way action.

Side-way characteristics of the current down-trend could be noticed from the beginning (August 9, 2010) of this down-trend. It is difficult to compare the current down-trend to the previous down-trends we had over the last couple of years. Te previous down moves where more consistent and had much less side-way trading sessions. It is already almost a month since the indexes in the bearish move and, so far, during the recent decline, we have not seen two strongly negative session in a row. Yet, mainly because of the side-way trading, we still have not seen panic trading which would be characterized by the strong bearish volume to the price down-side and strongly oversold advance/decline issues and volume readings.

The other characteristic of the current down move is the high level of volatility. The volatility is not extremely high, yet it remains steady on the high level.

The same a s a week ago, I would say that the majority of technical indicators remain to be bearish by suggesting the better odds of the further decline. Yes, the Friday's advance has pushed some technical indicators into bullish sentiment and if you take a look at shorter-term technical analysis you may see some bullish signals. However, in order to have a strong up-move, in addition to the bullish signal, the stock market should be predisposed to the up-move. So far, we may see bullish signals on shorter-term frames, yet, personally, I have not seen any strongly oversold indications. Therefore, I would not place a long bet.

S&P 500 Financial

Last week in the "Volatile Markets" report (on August 15, 2010) I stated: "I would say that the odds of the further decline are higher. However, taking into account volume surges and low advance/decline reading on August 11, the one who is in short may consider setting a stop loss to protect a profit already earned since the time when August 6’s lows were broken.... the volatility level is still high, which means that we may see sudden and strong reversal, therefore it could be recommended to monitor charts daily.". The stock market continued to be volatile: we had strong bounce up on August 17, 2010 and then continuation of decline on August 18-20, 2010. By weekly results the indexes (S&P 500 and DJI) moved lower. The exception was the Nasdaq 100 index which stayed above its August 16's Low.

The Nasdaq 100 index was less bearish than other indexes, which could be explained by high bearish volume surges during the decline on August 10-12, 2010. The S&P 500 and DJI indexes did not have such strong bearish trading activity in that period, therefore they were more bearish.

At this moment the majority of technical indicators remain to be bearish by suggesting the higher odds of further decline. However, I would like to drag your attention to the S&P 500 Financial index. If you take a look at this index you will see extremely strong bearish volume over the past two week. We have not seen such strong bearish trading in the financial sector since October 2009. This volume explains that there are many traders in panic of double dip reception (widely advertised all over the news), with fresh memory of crash in the financial sector, who are trying to pull funds out the financial stocks while other (I believe institutional traders) are buying from them in huge volumes (because those stocks most likely still under-priced).

Because of this strong bearish volume in the S&P 500 financial index I may assume that we could be closed to the bottom of the recent correction. Yet, it would be nice to see strong oversold signals first in the S&P 500 and DJI indexes - so far we have not seen strong bearish volume on these indexes on daily charts,

Volatile Markets

I mentioned a week ago in the "Trading strategy" post on August 8, 2010: "even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used.... If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears." - this is exactly what happened on August 1, 2010 - the lows were broken and the indexes continued to decline.

Now, majority of technical indicators are bearish and suggest good odds of further decline. Yet, as it always happens in case of technical analysis - there is always something that points in opposite direction.

In the current situation, on August 11, 2010, the strong decline has generated great bearish volume surge. In addition, on that day we had extremely low advance/decline volume and issues readings. If we compare August 11 to July 16, we will see that even smaller bearish volume has pushed indexes up. Furthermore, there is still a possibility that this volume may cause up-move. At the same time, from the bears prospective of view we may say that volume and advance decline signals on August 11 were too close to the recent highs to consider them as strong bullish signals. Another point is that even we had extremely low (extremely oversold) advance/decline reading in the S&P 500 and DJI sectors, the NYSE composite advance/decline volume was not even strongly oversold - yes, it was bearish but not strongly.

Overall, I would say that the odds of the further decline are higher. However, taking into account volume surges and low advance/decline reading on August 11, the one who is in short may consider setting a stop loss to protect a profit already earned since the time when August 6’s lows were broken.

Another aspect that should be considered (on my opinion) is that the volatility level is still high, which means that we may see sudden and strong reversal, therefore it could be recommended to monitor charts daily.

P.S. It does not looks like we have quite summer vacation trading...

Trading Strategy

On July 31, 2010 in my "Volatility" post I mentioned "Overall, I would say that you may find a number of technical indicators that suggest possibility of up move. My technical analysis tells me that this possibility exists as well, yet, so far, I do not see the indexes gonging higher their June 21st and July 27th highs." Taking look back at the past week, we had relatively quiet and side-way trading with exception of strong up move on Monday's morning and strong swing down and up on Friday. The S&P 500 index stuck in side-way action exactly at its high seen on June 21st, 2010; the Nasdaq 100 index - a little bit below and the DJI index a little bit about.

Now, by analyzing indexes I would say that the situation is mixed at this point. From one side on the longer-term charts we have decrease in volatility which would suggest the possibility of up-move. From other side we started to see negative divergence on many technical indicators - when price moves up and makes new high, yet an indicator either moves side-way or moves in opposite direction.

If I would analyze all technical indicators I would say that, because of the side-way trading over the last 5 days, 50% of technical indicators are neutral and could be interpreted either as bullish or bearish, 25% of indicators are bullish and the rest 25% are bearish. The one may ask how a trader can make a decision in such situation. The main challenge of technical analysis that the stock market never gives you 100% clear signals. There are always some technical indicators that favor up-move and some technical indicators that favor bearish trading. The challenge is to define what indication is more important at given period of time.

In the current situation, even I more bearish (because of negative divergence I see on many charts), I would say that (as in most cases of side-way trading) a simple strategy could be used. Every side-way trading defines upper and lower lines of side-way corridor. If upper line of side-way corridor (high on August 4) is broken - odds would favor bullish trading. If lower line of side-way corridor (low on August 6) is broken - odds would favor the bears. Until then conservative approach on my opinion would be to remain in cash.

Volatility

As I mentioned a week ago in my "Volatility, Volume and Economic News" post (on July 24, 2010): "results of my technical analysis suggest that the stock market ... is quite weak, unstable which and may reverse into another down turn" - we had volatile and overall negative week. Yes, the stock market (S&P 500, Nasdaq 100 and DJI indexes) only about 1% down from the previous week close, yet, we saw quite negative trading over the past five trading sessions.

There are three specific factors that should (on my opinion) be paid attention to. First one is an increase in Volume, second one is increase in volatility and the third one is that the indexes (see my "DJI Chart" post on July 4, 2010) are close to their previously seen resistance levels.

From one side an increase in volume during the decline on July 29, 2010 could cause the indexes to move up. The high volume is quite noticeable in the Nasdaq 100 and S&P 500 sectors. Taking look at this as well as at the fact that we saw change in the money flow on July 30, 2010 a technical analyst may assume that we may see  some up-move reaction on that "strong selling". From other side, not all indexes had strong bearish volume surges (surges during price decline) on that day. At the same time by going into the higher time-frames we may see that the volume increase is not as strong as it looks on intraday charts. Another factor is that even these bearish volume surges were noted during the price decline, actually, they occurred not far from the resistance seen on July 27, 2010.  From this prospective, I would say that my technical analysis suggest that we may see some up-move however I would not expect it to be very strong.

The volume leads us to the second factor - increase in volatility. We saw frequent changes in the trend over the past week (especially last two trading sessions). This is a bearish sign. It's not good to see increase in volatility close to the top. Very often it could mean that institutional traders (traders that invest huge amount of funds) are trying to sell at the top yet they cannot sell everything they have because they do not want to create selling pressure and they do not want to push stock market down before they dump what they want to dump.

Overall, I would say that you may find a number of technical indicators that suggest possibility of up move. My technical analysis tells me that this possibility exists as well, yet, so far, I do not see the indexes gonging higher their June 21st and July 27th highs. From the mid-term prospective, last five trading sessions could be considered as side-way trading with increase in volatility. At the same time longer-term charts indicate more bearish signals. Because of that I would expect to see some development of bearish trading and I would monitor charts more closely during the trading hours to see confirmation of that on intraday levels as well.

Volatility, Volume and Economic News

It looks like the summary I posted last week in my "Leading and Lagging Indicators" post (on July 18, 2010) was confirmed by positive trading week. In that post I stated "Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.". Already on Monday (July 19) some technical indicators started to generate bullish signals an already on Tuesday majority of them became Bullish.

Taking a look back at the past week I cannot say that this is that kind of up-move I expected. As a rule, an up-move is less volatile than down move, yet, past week's price advance is an exception. If you take a look at volatility indicators on daily chart (1 bar = 1 day) you will see that volatility went up. From technical analysis prospective, this is not good sign for bullish trend. Another negative sign (on my opinion) is that the past week's up-move was supported by increase in volume which was especially clear in the Nasdaq market. This is not like healthy up-move looks like. Even the stock market moved up as I expected last week, because of the volume and volatility, I do not believe in a strong recovery toward April’s highs.

Another point that makes me cautious is the reaction of stock market on the economic news and reports. I do not analyze economic reports and I do not base my trading decision on the economic reports. However, I monitor how stock market reacts on them. The last week has been enriched by good quarterly profit reports as well as by other economic news. The market did not react strongly positively on these reports, yet it did not miss smaller bad news. This would not be a characteristic of a healthy up-trend as well.

In summary, because of the increase in volatility and volume as well as because of the weak stock market reaction on positive economic reports, I would stay on alert about further up-move. Of course, if I see further advance which would be supported by decline in volatility and volume then I may change my opinion. Yet, so far, results of my technical analysis suggest that the stock market (Nasdaq 100, DJI and S&P 500 indexes) is quite weak, unstable which and may reverse into another down turn.

It does not mean that I am rushing into short position. The indexes are still on their up-side and there is a good possibility that we may see further advance. However, I would monitor charts closely for changes in the sentiment. When volatility is high changes could be fast.

Leading and Lagging Indicators

By following my "Index Trading" post on July 10, 2010 where I wrote "In summary I would say that I see number of factors that favor further up-move." we basically saw positive trading at the beginning of this week.

Then in my "Increase in Volume" post on July 13, 2010 I stated "At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week." and then in my "Nasdaq 100" post I mentioned "Yet taking into account increase in volume I may expect a slow down of the current recovery, and at leas a side-way trading - then we may see how it develops.". As it happened, we had 2 trading sessions of side way trading (July 14-15, 2010) and then strong decline on the last day of the week (July 16, 2010).

Now, the main question is whether the stock market (Nasdaq 100, S&P 500 and DJI) indexes will continue their drop, or there could be other scenario. Below, I tried to summaries some points that on my opinion may help in understanding possibilities of further trend development.

1. The Friday's drop down was very strong. The Dow Jones Industrials dropped on that day by 2.8%. The stronger DJI bearish trading last time was seen on June 29, 2010 and on June 4, 2010.
2. The indexes were only two trading sessions in side-way trading at the top before that decline (June 14-15).
3. During that decline we had very strong oversold advance/decline readings (in both issues and in volume)
4. During that decline we had strong output of the bearish volume (very high trading volume).

All four points above would recommend that this is could be logical healthy drop down to release some overbought pressure collected over the 8 positive trading sessions in a row on the Nasdaq 100 ( 7 positive sessions on DJI) and now, even we could have some further decline the odds could be good that we may see indexes back to their June 13-15 high levels.

The Bearish points are:

1. Majority technical indicators show bearish signals.
2. Volatility is increasing.

Leading indicators (volume and advance decline based technical studies) signal that the stock market (indexes) is predisposed to bounce up. However, most of the lagging technical studies (price based indicators) are bearish.  The high volatility is very important factor on my point. Because of high volatility we may see strong and sudden changes in a trend when most of the technical indicators (due to a lag) would generate signals when it's too late to open/close position. High volatility also suggest that the market is still weak and even if we see bounce up, if the volatility does not go down, there will be a possibility of developing of another down-move.

Overall, by summarizing all of the above, I would say that if I would be in short, I would think about closing short position or at least about setting a stop-loss to protect profit. I would not rush into a long trade (majority of indicators are still bearish) and I would monitor index charts closely for possibility of changes in the sentiment toward bullish trading.

Nasdaq 100

This is seventh  positive session in a row on the Nasdaq 100 and DJI indexes. In addition today's daily volume even stronger then the yesterday's daily volume on some indexes.

Below you will find some statistics about 7 and more positive sessions on the Nasdaq 100 index:

Period	# of Positive Sessions	# of Advanced  Points	Were change in a trend witnessed after?
Jul 2, 2010 - Now	7	6.78	?
Feb 24 - Mar 12, 2010	13	6.79	NO
Nov 2 - 11, 2009	8	6.53	YES
Oct 5 - 14, 2009	8	5.30	YES
Jun 8 - 27, 2009	12	12.57	YES
The next one goes back to 2007

The numbers above do not imply that we may see a down-turn. Yet taking into account increase in volume I may expect a slow down of the current recovery, and at leas a side-way trading - then we may see how it develops.

Increase in Volume

I just wanted to mention that it could be worth checking the volume. Maybe an increase in daily volume is not big in the Nasdaq 100, S&P 500, DJI and NYSE Composite sectors, however some indexes (like Russell 2000 and S&P 400) show quite strong daily volume. This is summer time and current volume increase could be considered worth attention at this period of time.

I do not want to say that this is is a signal to sell. As I mentioned before in the "Index Trading" post on July 10, 2010, an uptrend does not usually ends suddenly - as a rule there is couple of trading sessions in the sideway action at the resistance level. Yet, if we see further increase in daily volume it may halt the current advance.

At this moment the majority indicators continue to be bullish and, personally, I would expect to see positive and sideway trading during this week. Still, the market likes surprises and it is already sixth positive session in a row in the Nasdaq 100 index In addition it is options expiration week So, an advice from my side could be only one - monitor charts on the daily basis.

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Index Trading

It look like my bullish points highlighted last week (see my "Technical Analysis" post on July 5, 2010) have been paid off. In that post I wrote "Taking into account that the DJI and many other indexes are at the bottom of the historically defined longer-term side-way corridor (see charts in my previous "DJI" post) I would assume that we may see a bounce up. At this moment, I would not try to guess whether it could be just a small bounce or a strong recovery toward April's highs." If on Tuesday July 6, 2010 there could be some skeptical thoughts about my bullish points, then, I think, the last three days of the strong rally up have confirmed that the indexes were oversold indeed and that historically defined long-term side-way corridor is still "in charge".

As I mentioned before, I will not try to guess how far the indexes (Nasdaq 100, S&P 500 and DJI) may go up. They may go all the way to the highs seen in April 2010, they may go to the resistance we had in the middle of June 2010 or they may advance just a few points up and then started to drop. I know, this may sounds a little bit annoying and some of the readers would expect rather to get straightforward answer. To those readers (traders) I may only say "I am sorry, I do not do it". I watch stock market (indexes and ETFs) on daily basis from 9:30 until 16:00 EST. For me, the stock market is an alive entity that is in the constant change. Today it strongly bullish and tomorrow it could be strongly bearish and the day after tomorrow it could be strongly bullish again.

So far, the majority technical indicators are bullish by suggest the good odds of the further recovery. I like that the volatility goes down, which mean more stable trading. I like the high volume at the beginning of the recovery on June 7, 2010, which I interpret as a buying action of institutional traders. I like that the market bounced from the bottom line of the longer-term side-way corridor (see charts in my "DJI" post). In addition we are in the beginning of the "Summer Vacations" period when we may expect low trading volume and more stable trading which is usually favors up-move. In summary I would say that I see number of factors that favor further up-move. Yet, I would still recommend monitoring charts for any the changes in the sentiment. As a rule up-move does not ends suddenly - in majority cases we may see couple of trading session of side-way move at resistance.

Technical Analysis

A week ago, on Monday June 28, 2008 in the "Nasdaq 100" post I have wrote "it is difficult for me to believe that the current side-way trading may grow into a recovery. Majority of technical indicators continue to remain bearish. The Nasdaq 100 is maybe the only index that shows some small oversold condition. The disturbing thing for me is quiet trading (no increase in volatility during the recent decline). It sounds like a 'silence before storm'." On the next trading day we had a strong continuation of the decline.

Now, when the indexes dropped about 15% from the April's top (16% on the Nasdaq 100 and S&P 500 and 14% on the DJI)  and about 9% in the last run down from the June 21st High (11% on the Nasdaq 100, 10% on the S&P 500 and 9 %  on the DJI) it could be a good time to look at the technical indicators to see what technical analysis suggests.

There are several points that I would like to focus on:

• The Nasdaq 100 index  had 10 negative trading sessions in a row;
• We had extremely low advance/decline sentiment readings on June 29, 2010;
• We had increase in daily volume during decline on June 29 and July 1, 2010;
• Starting from July 1st we ma see change in the money flow direction - it is negative, yet it moves toward positive area;
• Many technical indicators, including RSI, Stochastic, MACD and others, are showing positive divergence when the price makes new lows yet an indicator does not makes new low and in some cases even moves up.

By summarizing all of the above I could say that my technical analysis suggest the the stock market could be considered oversold on this stage (predisposed to the reversal). We had strong move down, we had oversold advance/decline readings, high volume on June 29 - July 1 suggests that panic selling hit many traders and number of sellers should be not as big as it was a week ago.

Taking into account that the DJI and many other indexes are at the bottom of the historically defined longer-term side-way corridor (see charts in my previous "DJI" post) I would assume that we may see a bounce up. At this moment, I would not try to guess whether it could be just a small bounce or a strong recovery toward April's highs. There are still a few factors that make me cautious: one is that the volatility is still high and second is that I would expect to see stronger increase in the volume after such deep drop.

DJI Chart

I have not been posting a chart for a while and mainly because of the current market position, I think it would be nice to take a look at the location of the indexes in relation to the previous support and resistance levels. On December 20, 2009 in my "DJI" post I already referred to the DJI (Dow Jones Industrial) longer-term charts. See below the DJI chart (chart #1) I posted at that time.

Chart #1: The DJI Chart 10-year view of the historically defined 8% side-way corridor

At that time when the up-trend was in the its full force, I alerted that the stock market is entering the sensitive area. Maybe I sounded funny when I expressed a possibility of side-way trading at the moment when the stock market up-move looked unstoppable, yet, I would like to show continuation of the same chart (see chart #2 below). I think, now you my try to analyze by yourself about a possibility of long-term side-way trading.

Chart #2: The DJI Chart 10-year view of the historically defined 8-10% side-way corridor

I do not want to state that the stock market will bounce up to to its April's highs - additional analysis on lower time-frame would be recommended for this. The DJI index has already been in this sensitive side-way corridor for about 8 months. It could be the end of the side-way trading or it could be in the middle. From the charts above you may only say that the current movement is more volatile than the side-way trading trading in 2004-2005, yet it less volatile than the side-way trading 1999-2001. Still if the indexes (DJI, S&P 500 and Nasdaq 100) bounce up - it will be the first bounce up only in this historically defined sensitive sideway corridor; and at this moment, my personal technical analysis confirms that such scenario is quite real.

Nasdaq 100

Last week in my "Too Far Too Fast" post (on June 20, 2010) I have mentioned following "The trading volume over the past week was low (actually regular) which would not indicate greedy buying. I do not want to tell that this is the end of the recovery. We may see some drop down and then further run towards new highs. There is a possibility of such scenario and technical analysis points to that at this moment. However, if "big money" do not believe in strong recovery, for me it's difficult to believe in it either. Furthermore, I would be cautious and monitor stock market sentiment more closely."

It looks like not just me but the stock market in whole did not believed in strong recovery - starting from June 21st (on the next day after my post) we have been moving down.

If you take a look at the daily index charts (Nasdaq 100, S&P 500, DJI, etc) you may notice that the recent move down was relatively quiet. We did not have extremely low advance decline sentiment readings, we did not have increase in volatility and we did not have substantial increase in volume. In summary we may say that 4-5% drop over the past 5-6 trading session did not generate any panic on the stock market and this is not how a down-move usually ends.

If you take look at history - check the volume at the bottom of down move in the begging of October 2009, at the end of October 2009, in January-February 2010 and most recent on May 19-21 and on June 4-9 - you will see that all moves down are marked at the end by a strong increase in volume (volume surge). The current move down did not bring a lot of additional volume. We had only small increase in volume on June 24-25 and we have basically side-way trading since then.

Mainly because of the steady volume, it is difficult for me to believe that the current side-way trading may grow into a recovery. Majority of technical indicators continue to remain bearish. The Nasdaq 100 is maybe the only index that shows some small oversold condition. The disturbing thing for me is quiet trading (no increase in volatility during the recent decline). It sounds like a "silence before storm".

Too Far Too Fast?

There were good positive signals last week (see the "Is it Recovery?" post on June 13, 2010) and we had positive trading this week. I guess, now (as there always was, is and always will be) the same traditional question is "What is the next?"

By summarizing cons and pros of mine technical analysis I may say that the longer-term technical indicators suggest possibility of further recovery and shorter-term technical indicators point to a possibility of move down.

From one side we had a strong correction and it would be logical to see a strong recovery. From other side there are worries about Europe and, as I already mentioned before, the stock market run "too far and too fast" in period from March 2009 until April 2010 (CheckS&P 500 and Nasdaq 100 charts). The U.S. economy did not do as well as the Wall Street. I would consider that there could be a possibility that the market was pushed too far up by big institutional traders (hedge funds and big guys) - the same as during the stock market crash the market was (on my opinion) pushed down too far by the same "fellows".

From the technical analysis prospective, as I mentioned above, the longer-term indicators suggest possibility of further up-move. We may see positive money flow, volatility slowly declines, etc. The only thing that bothers me is that I have not seen high volume at the beginning of the current recovery. High volume at the beginning of a recovery usually suggests that the big institutional traders (those who run the market) expect strong up-move and do not mind invest into the market which is on the rise from the recent support. The trading volume over the past week was low (actually regular) which would not indicate greedy buying. I do not want to tell that this is the end of the recovery. We may see some drop down and then further run towards new highs. There is a possibility of such scenario and technical analysis points to that at at this moment. However, if "big money" do not believe in strong recovery, for me it's difficult to believe in it either. Furthermore, I would be cautious and monitor stock market sentiment more closely.

Is it recovery?

By following my last week post (see "Another Crash" post on Sunday June 6, 2010) we had two days of decline (Monday-Tuesday) and then after the indexes (S&P 500, DJI, Nasdaq 100, etc) hit the May 25's lows they reversed and recovered.

Now, when the indexes are at their June 3rd high levels (S&P 500 and DJI, Nasdaq 100 is lower) the question could be asked whether we see bounce from these levels down and continuation of downtrend, or the indexes will continue to recover. To answer on this question, I think we have to take a look at higher timeframe charts.

By looking at 1-year and higher timeframe charts I may say that starting from the beginning of June, I may see slow change in the money flow. The same tendency could be seen in the sentiment defined by the  group of the Advance/Decline (breadth) indicators. This is a good point and would suggest that we may see a recovery toward May 12th highs.

The second positive sign is that the correction down (the market is right now) is quite strong. We had very strong bearish volume surges and we had strong oversold readings on many technical indicators. So, from the technical analysis point of view the stock market could be considered oversold which mean that it has a potential (the money that were pulled out from the market could be injected back) to go up.

The third positive point is that the trading volume is lower which could suggest that the period of panic actions could be over. The indexes did not drop below the bottom marked on May 25th and we did not see any strong bearish volume during June 4-8 decline. This is good and if we continue to see market going up easier (on weaker signals) then going down (on stronger signal) it could indicate that period of worst is over (at least for some time).

Still, the biggest negative sign is high volatility level. Starting from the end of May volatility did not increase, yet, it has not became lower as well. This suggests that even if we see a recovery toward May 12th high, if we do not see decline in volatility, it could be just a temporary recovery before other correction.