Indexes

DJI and S&P 500 indexes just broke their September 17's high. Good sign to rally closer to the resistance seen in April 2010. The Nasdaq 100 is behind. As I previously mentioned, the Nasdaq 100 rally in September was much stronger in comparison to the September's up-move in S&P 500 and DJI sectors. Therefore when it comes to new highs the Nasdaq 100 stays behind of other indexes.

The market continue to be volatile. I will not be surprise to see another swing down, especially after such increase in volume during the last swing up.

Unsertain Sentiment on High Volatility

It was a quite volatile session today: opening at high, then swing down, then swing up, then decline, then recovery. At the end of the day the indexes are where they were yesterday. The indexes did not continued the up-rally we had on October 5th, yet at the same time the indexes do not rush into correction.

From one side it is difficult to believe that 2-3% correctional move down (mostly side-way trading) we saw at the end of September would release the market (indexes) from the overbought condition the indexes should be after September's bullish trading. From other side it is harder to break bullish sentiment into correction than bearish sentiment.

I think many technical analysis are betting on the S&P 500 and DJI hitting their highs seen in April 2010. Maybe it is were they are going, however, I do not like volatility. If you check daily charts, you will see that such up and down swings are very often noted before strong declines.

Bullish an bearish signals

The indexes are down despite the good "job reports" - it looks like the market (investors) starts to ignore good news and focus on bad news.

I do not believe in news analysis - there are always bad and good news and there are no cafeterias that would define the importance of the news. However, the same as in technical analysis you may see moments when bullish or bearish signals (news) are ignored and such moment could be considered as signals as well or at least as a moments to be on alert.

DJI down, Nasdaq up

Indexes are quite volatile today - jumping up and down.

In opposite to yesterday, the DJI is pushing down while Nasdaq holds the ground.

DJI Flat - Nasdaq Down

We had Nasdaq 100 down today, when it lost more than 50% of yesterday loss - this good for Bears. On the other hand the DJI index did hold the ground and stayed at yesterday close level - this is good for Bulls. The S&P 500 index was between them and it was ready to follow the strongest one.

This is a mixed situation. We have to keep in mind that in September the Nasdaq 100 up-move was much stronger than the DJI and S&P 500 up-trend. Respectfully, the Nasdaq 100 could be considered to be oversold stronger. Yet, as I previously mentioned, if an index is oversold and predisposed to move down it does not necessary imply that this index will go down - it is good to wait for some reversal confirmation.

Following Volume

The first scenario (see yesterday post)???: "High volume means big players ... selling at high (indexes are at their 5-month highs) to greedy buyers and to short players whose stop-losses were hit when indexes opened strongly up."

Or it's too early o judge???

New day - New data

New day - new data - new view on the market. In similar to September 30h way we had strong opening. Index futures traders have pushed the indexes up before the bell, yet, in opposite to September 30th way this time positive sentiment on futures market was supported by positive move on the stock market and indexes continued to move up.

As I mentioned above, new day brought new data that on my opinion attention should be paid to:

 - we had very strong volume during today's run up. The strongest increase was seen in the financial sectors (see Nasdaq Financial and S&P Financials). NYSE daily volume is the highest daily volume since July 16, 2010. Nice volume increase was seen in the S&P 500 and DJI sectors. However, the Nasdaq 100 index volume was not as high;

 - we had very extremely strong bullish advance/decline readings;

- we have further increase in volatility on daily charts;

- S&P 500 and DJI broke their high levels seen on September 30, yet the Nasdaq 100 index stayed below its high.

High volume means big players are in the game. The question is what they are doing - are they selling at high (indexes are at their 5-nmonth highs) to greedy buyers and to short players whose stop-losses were hit when indexes opened strongly up. Or they are buying at high because they have information that assures them that the market will go up without any correctional move down??? I do not think retail traders could be selling in such amounts. However, there could be other big players who decided to play short at high - in this case this is a battle between giants and we should see who wins when we see volume down.

Another Blog

Just run into another blog that like me uses MarketVolume's charts in analysis:

http://smartmoneyvolume.blogspot.com

Indexes started this morning by jumping up and down - volatility was always a good sign for bears.

Index Technical Analysis

As I mentioned a week ago in my "Increase in Volatility" post: "My expectation from the coming week are neutral. If we do not see strong decline on Monday, then I would expect to see side-way trading. Even if we see decline, I would expect the indexes to be above September 23's low in side-way action." - this is the exact scenario of what we saw over the last five trading sessions. The S&P 500 and DJI indexes are where they were last Friday (on September 24, 2010) and the Nasdaq 100 index slightly declined, yet, it is still above its low seen on September 23, 2010.

After a week of side-way trading, from technical analysis prospective, I would say, that many of technical indicators have generated bearish signals on Thursday September 30, 2010. However, side-way trading on Friday October 1, 2010 has pushed most of them back into neutral area.

Even most of technical indicators on the indexes hourly charts are in the neutral area, on the mid-term charts (1.5-year chart) we may see many bearish signals and bearish sentiment on these charts is quite strong. I consider that the market is strongly predisposed to have at least some correctional move down by the following reasons:

 - September was the positive month and there is no doubt for me that that market could be considered overbought (we had big positive volume/money accumulation over that period) which does not imply that the market will change its direction but which means the stock market is predisposed to change its direction;

 - After being down we see increase in volatility on the mid-term charts which means that the mid-term traders become nervous which means that when they may start dumping their stocks in order to fix their profit at the current highs - it may push indexes down;

 - Even on some shorter-term frames we may see positive signals, majority of technical indicators on mid-term charts are bearish and after a week of side-way action mid-term trader could become major players on the market;

 - On Thursday (on September 30) before the market opened, futures traders encouraged by good economic reports have pushed indexes strongly higher. However, after the bell (after the market opened), their positive sentiment was not supported by the rest of the market. In opposite, the indexes (Nasdaq 100, S&P 500,DJI, etc) have hit levels where stock traders started to sell and their selling pressure pushed the market stronger down. Such behavior of the stock traders, when they sell by ignoring positive news, I usually consider as a break down point when the market is on the edge to move down.

My bearish mood does not mean that the stock market must necessary go down. For many traders, the conservative trading strategy would be waiting when the indexes (S&P 500, Nasdaq 100 and DJI) break either their low seen on September 23rd or their high we saw on September 30th.

Increase in Volatility

It was a volatile week. Strong opening on Monday, then tree negative sessions in a row (Tuesday-Thursday) and then again strong opening on Friday which basically made the past week positive. Even the Tuesday-Thursday's move down is quite shallow it is the strongest one since the beginning of September.

I'll try to be short this time. From one side my technical analysis suggests that the indexes are overbought and we may see some strong move down in the future. From other side we still did not see any confirmation signals of beginning of such move. Additional negative sign is that the past week has brought increase into volatility on the longer-term chart.

My expectation from the coming week are neutral. If we do not see strong decline on Monday, then I would expect to see side-way trading. Even if we see decline, I would expect the indexes be above September 23's low in side-way action.

Index Trading

side-way trading on the S&P 500 and DJI indexes and eight straight in a row positive trading sessions on the Nasdaq 100 index - this is what we have by the end of the week. There is quite different picture on other indexes. As an example, the Dow Jones Utilities (^DJU) index is already in the correction down since September 9, 2010.

Overall, we have not seen negative moves on main market indexes over the past week. However, the same as I mentioned in my few previous posts, I would say that intensity is growing.

Some points to consider, which I think are important.

• The advance/decline issues and volume ratios are moving down on all three indexes (Nasdaq 100, DJI and S&P 500). On the DJI and S&P 500 indexes the advance/decline ratio is already negative. This indicator tells that the majority of stocks are already in decline. The indexes are not down because of the strong earnings reports and strong moves on some big companies (one company make 5% up and five companies make 1% down each - you have index flat).
•  We had big bullish volume surges on many indexes over the past couple of trading sessions. The strongest bullish volume surges were noted in the insurance and internet market sectors. Such surges indicate that big institutional traders make a decision to fix profit at the top and sell big number of shares to greedy retail investors. Personally, I would stay away from the investing into insurance companies, especially by knowing that the Government is putting hand on the health insurance which will take away some profit from the insurance companies.
•  Taking into account big bullish volume accumulation on many indexes over the past two weeks, the stock market could be considered overbought. The indexes (Nasdaq 100, S&P 500 and DJI) did not have any noticeable correction over the past two week.
•  We have negative divergence on many technical indicators - when the price moves up and make new highs yet an indicator does not make new highs. As a rule this suggests changes in the stock market sentiment.
•  All over the media you may hear positive news, like there are no negative news at all - this is a negative sign for me. I consider it like attempt to manipulate sentiment of small traders and make them buy while "big boys" (who invest big and who express opinion on news) are dumping.

Some positive signals

• Longer-term volatility is down - this is a positive sign.

In summary, I would say that that technical analysis suggests that the market is predisposed to move down. Some indexes and market sectors are already in decline, yet, main market indexes are still at the top. My opinion is that we may face bearish trend, yet I could be wrong. If the market is predisposed to move down it does not necessary mean it will go down - we still may see side-way trading. A conservative trading strategy could be waiting for confirmation signals before investing.

P.S. Some interesting quote from the news - something negative that is not strongly highlighted in the media: "Regulators on Friday shut down three Georgia banks and one each in New Jersey, Ohio and Wisconsin, boosting to 125 the number of U.S. bank failures this year … The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three succumbed in 2007."

Intensity is growing

Seven trading sessions in a row the Nasdaq 100 have been positive. The rest of the indexes are forth session in a row in the side-way move. Intensity is growing...

Advance/Decline ratios on the S&P 500 and DJI are already negative...

Nasdaq 100

The indexes continue to move almost flat, with exception of the Nasdaq 100 index. It looks like the indexes are ready to go down, yet they wait until the Nasdaq 100 collect more overbought power.

The are two interesting thins happened today.

We had extremely strong volume surges in the Nasdaq Insurance and Nasdaq Internet market sectors. Keep in mind that this is sixth positive trading session in a row on the Nasdaq 100 index. These surges in the Nasdaq sector indexes would push the Nasdaq in stronger overbought condition.

Another point worth mentioning is very low volatility by the end of today's session on all indexes. I have already mentioned several days ago in the "Volatility Down" post (on September 9, 2010) that such drop in volatility is considered as "The Squeeze" and very often noted before sharp and strong swings. In addition, such low drop in volatility is very unusual in period of futures expiration - this Friday we have options expiration, futures expiration and index options expiration ("Triple Witching Week").

Increase in Volume

As I mentioned two days ago "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." - we had yesterday strong and sharp up move.

Another point that is worth mentioning is an increase in daily trading volume (nicely seen in the Nasdaq 100 sector) over the last three trading session. While technical analysis continue to remain bullish it could be "too close" to the "to late" to open a long position. At the same time it would be too early to play short.

DJI, S&P 500 and Nasdaq indexes have hit their resistance levels seen in the middle of June and at the beginning of August 2010. The indexes bounced twice from the levels they are right now and there is a possibility we may see the third break down. Still, it could be nice to see a couple of sessions of side-way trading prior to that.

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.