S&P 500 Technical Analysis

With exception of Monday, the past week could be considered positive. Yet, by the end of the week the indicators make me somewhat cautious about the further trend. The correction we had from June 12, 2009 until June 23, 2009 could be considered as the strongest down turn since March 9, 2009 (since the market is in the longer-term up-trend). The high levels the indexes hit in the beginning of June became a strong resistance barrier. The Dow Jones Industrials (^DJI) has been fluctuating around the same resistance level for a month (from December 1, 2008 until June 9, 2009). The S&P stuck close to its current resistance in December 2008 as well. Yes, the Nasdaq 100 index is one of the indexes that recovered stronger, but we should remember that the Nasdaq 100 represent non financial companies and was less affected by 2008 stock market crash.

So, we may see that June’s high levels are quite sensitive and even if indexes continue to move higher by recovering from the recent correction I would consider that the odds are pretty good that we may see them stuck at the marked resistance level again. I would say that we may even see second bounce from there (this is just my opinion based on my personal technical analysis).

Despite the recent up-move (from June 23, 2009), at the current moment my longer-term technical analysis is not very optimistic. For a longer term sentiment I usually refer to the daily charts: from 1-year (1 bar = 1 day) to 3-year (1 bar = 3 days). I do not give snapshots of these charts in this post, however, I will try to post them in one of my next posts. All these charts are Bearish at this moment: I see negative money flow, I may consider that the market become somewhat overbought after the strong 3-month recovery rally (March-May 2009), average daily trading volume is down which means that the first wave of Bullish investors who push market up become exhausted, etc. Overall, my longer-term technical analysis is Bearish. However, on the other hand, we should not disregard the fact that during the recent correction down the main indexes (S&P 500, DJI, Nasdaq 100, Russell 2000…) were released from their overbought conditions at least partially which could keep the market and indexes at the current high levels.

In a shorter term – see S&P 500 index hourly chart below – we may see some sentiment changes towards bearish mood: SBV moves down, high green MVO (volume surges during the price up-move), declining Advance/Decline Oscillator, declining MACD and declining RSI. Stochastics is still could be considered positive and McClellan Oscillator is still above zero line which is a positive sign as well. In summary, I would say that my shorter-term technical analysis results point to the possibility of slide. Again (as I mentioned before) this is intraday chart and should be monitored during the trading hours for possible changes in the sentiment and trend.

Chart: S&P 500 index 60-day view (1 bar = 1 hour)

Stock Market Crash - 1974

As a continuation of the series of charts dedicated to the stock market crashes I would like to present the Dow Jones Industrials chart in period of 1973 and 1974 years. In almost 2 years the  Dow Jones Industrial Average (DJIA) lost over 45% of its value - not the worst but still the pretty bad and prolonged recession. The crash came after the collapse of the Bretton Woods system, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement. The recession was compounded by the oil crisis in October 1973.

Chart 1: Dow Jones Industrial chart, 1973 - 1974, 1 bar = 3 days

DJI Chart

I have expressed in my last week three factors worth of attention. One of them was the indexes (S&P 500 and DJI) moving sideways on the January 6, 2009 high levels. The recent bounce down from these levels confirms that these resistance lines indeed are sensitive for many traders.

While shorter-term charts and technical analysis are positive and show some odds of possible move up to the recent high levels (June 11, 2009 highs), the longer-term charts and analysis are not as optimistic. From the chart below you may see the significant drop in the daily volume which means that the main players (long-term institutional investors – "Big Money") finished investing (relocating funds) into the stock market. Starting from February 19, 2009 these institutional traders were attracted by the bargain cheap price of the under evaluated stocks and were buying in huge volumes. Their buying power was the main engine that pushed the stock market up. Now, when their buying power became somehow exhausted (trading volume become lower) we may expect the stock market trend be more dependable on the smaller players’ sentiment. I would put a question in this way: "Are the long-term non-institutional traders (who have a lot of money but not big bags) encourage the March-June rally up or they consider that they may enter the market later at lower price or when they are more confident?"

The positive thing is (I repeat what I mention in my several past posts) that the volatility is down. That means that even if we see strong correction down it’s not going to be unexpected sudden 10% drop down and most likely majority of the technical studies including trend-following indicators will be able to signal this correction. Actually, I consider that the trend following indicators could be the best in this situation. We already may see some negative money flow; we may see some overbought conditions; we understand that even for the further healthy recovery a correction down would be ok – all we need a confirmation from the trend-following technical analysis.

Stock Market Crash - 1987

Another nice picture of the stock market crash in 1987. On "Black Monday" - October 19, 1987 - the Dow Jones Industrials dropped 22.68% in a single session. This was the biggest percentage drop in the DOW history. It is interesting to see the extremely high volume surge during this crash which marked the bottom of the panic selling. Since volume is always 2-side transaction this huge volume indicates that somebody was buying in big volume from desperate traders until the end of October 1987 - in 11 month (in September 1988) the DOW index was back above $2,700 level.

This volume chart is a perfect example of how institutional money collected underpriced shares from traders who was in panic

Stock Market Crash - 1929

I just thought it would be interesting to see the nice charts of 1929 stock market crash. I had opportunity to browse these charts (courtesy ofwww.marketvolume.com) and decided to share it.

As you may see from the charts below, 200 pointsof crash down in 2 months in 1929, then 100 points up for the next 5 months (until May 1930) and then 2 years and 2 months (until July 1932) down to the $40 level. Keep in mind that 200 points at that time is more than 50% drop from the top in September 1929.

Chart 1: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days



Chart 2: Dow Jones Industrial chart, 1929 - 1934, 1 bar = 10 days

Simple Technical Analysis

Just a short post.

My longer-term technical analysis show the bullish market.  Over the short-term (see chart below) some Bullish dominance as well.

Three factors that I consider worth attention: a) volatility is down to the Nay 2008 level; b) volume on the Dow Jones Industrials and the S&P 500 indexes is down; c) S&P 500 and DJI are at the January 6, 2009 high levels which are considered by many traders as resistance lines from which we could have bounce down. I'll try to provide more details on these three factors in my next post.

Leading and Lagging Techical Indicators

Short Description: some answer on subject of what technical studies to use.

The technical indicators (studies) could be divided into several categories by the type of data they are based on: price based indicators, volume based indicators, advance/decline (or Breadth) indicators and combined indicators that are based on price and volume or price and advance/decline data. The other way to classify technical indicators is to classify them by the way they are used in technical analysis.

There are three basic ways to use indicators in the analysis and a category that would cover each particular indicator depends on what this indicator indicates or what type of signals it generates:

1. Leading Technical Indicators – indicators that signal possible trend reversal in the future;

2. Lagging Technical Indicators – indicators that follow changes in the trend which also called trend-following indicators;

3. Informational Technical Indicators – indicators that do not predict nor follow a trend, but describe market, index or traded security. The examples of such indicators could be ATR, VIX and other studies are used to measure volatility, ADX that is used to measure strength of a trend and define sideway markets, etc.

In many sources you may find that the main role of technical analysis is to generate buy and sell signals. Based on the classification above I would say that this definition of technical analysis purpose is somewhat misleading since the informational studies which are used in analysis do not generate "Buy/Sell" signals. I would rather say that the purpose of the technical analysis is to analyze the current market or stock condition in relation to the past. After that, the result of technical analysis could be used in a trading system to generate "Buy/Sell" signals and most likely a good trading system would use technical studies from each category defined above.

A good trading system would use the leading indicators to signal a possible change in a trend. However, there is no 100% guarantee that after a leading indicator generates a signal you will see a reversal. As an example, a volume surge during the price decline signals possible change in supply/demand balance and following reversal move up. However, it does not tell you when it could happen: in 5 min, in an hour, in a day, etc. At the same time there could be situation when signals generated by leading indicators could be ignored – in our example of volume – the small volume surges could be ignored if stock or market is in strong up or down trend.

Now, we came to the lagging (trend following) indicators. They could be used alone, however, by itself lagging indicators could generate fake signals or generate signal when it is too late to open or close a trade. The best way to use them is in combination with leading indicators: a leading indicator generates signal about possible trend reversal and then lagging indicator confirms this reversal. In this trading strategy a trade is opened only after a lagging indicator confirms previously generated signal by a leading indicator. Al other situations when only one of the indicators signals a reversal are simply ignored. A trading system based on this strategy allows applying more sensitive setting to lagging indicators (by alone it would be considered very risky) and open a trade closer to reversals.

The last group of technical studies delivers important information used in technical analysis to adjust leading and lagging indicators setting as well as modify trading strategy in accordance to the current market condition. For instance ATR (Average True Range) is used in technical analysis to measure market (when applied to indexes) and security (when applied to a single security) volatility. It is usual that in highly volatile market we may witness rapid and strong changes in a trend. In this case a trader could be willing to adjust his/her indicators to be more sensitive (lower bar period setting, go to lower timeframe…). On the other hand in quiet market it could be good idea to set bigger lag (increase bar period setting, move to higher timeframe) and make indicators to generate signals with some delay. The ADX (Average Directional Index) could be another example of using informational indicators. ADX by itself does not generate signals at all -it tells only whether market/stock is in strong trend, weak trend or flat market. Based on the results of ADX analysis a trader may adjust a trading strategy and for instance trade only “Buy” short-term signals in longer-term strong up trend and trade only "Sell" signals in longer-term strong down-trend, and trade both signals during weak or sideway trend.

As you may see there are different technical indicators and as a rule professional analysts always use combination of them. Analysis of one indicator, sooner or later, may lead to the disappointment that this indicator is bad. My opinion is that there are no bad technical indicators - there could be only an incorrect way they are used. If you are looking for technical indicator that would generate stable positive return all the time I would recommend you do not waste your time but spend it rather on learning several technical studies that would help you to see the complete picture and not just some part of it.

S&P 500 Shorter-Term Chart

Those who follow my blog should remember the "S&P 500 Chart" post on May 24, 2009 where I draw the resistance line break of which would signal the end of the flat market we saw in May 2009. It looks like, now, we are back in the bullish market - at least technical analysis of daily charts (1 bar = 1 day) is positive again after being negative for the biggest part of May. Still, I would encourage everybody to take a look at higher timeframe charts by themselves to see what market stage we are in. Even if you do not trade indexes, even if you do not-trade in mid- and long-term, in some cases it could be useful to have some picture about situation on the stock market. It may help you to august your personal trading strategy to the current sentiment.

Taking a look at shorter-timeframe chart (hourly chart: 1 bar = 1 hour) we may see mixed sentiment, yet, with bullish dominance (see S&P 500 chart below). When I mention hourly charts I assume 3-day and smaller trends. Majority of technical indicators on this chart have bar period setting less than 20 and multiplying it by 1 hour (bar time frame) you will have maximum 20 hour coverage which is about 3 trading sessions (one trading session is six and half hours long). However, the market is still volatile (see ATR, VIX and other volatility indicators) and I would not bet on this chart for longer than a day ahead. Furthermore, this chart should be monitored during the trading hours.



Overall, as I have already mentioned above, my technical analysis applied to hourly charts show dominance of bullish sentiment (see direction of arrows for each technical indicator). There are still two negative signs: declining SBV and declining Advance/Decline oscillator, however, SBV is almost flat and previous Adv/Decl red area is much bigger than the recent green one.

General Motors and Citi Group

General Motors (ticker: GM) and Citi Group (ticker: C) are about to be removed from the Dow Jones Industrials and S&P 500 indexes. Very nice news, and good decision - better later than never. Those companies with lousy management should be removed from the indexes a half of year ago. If it would be done in December 2008 when GM and Chrysler requested bailout money (what a scam...), I would assume the recovery would started much earlier. As I mentioned in my "Automakers Bailout - Good or Bad?" post in December 2008: "this bailout could become a waste of money", it is sad to accept, but it happened. I am still taking the same old position: "Old fat, spoiled, lazy dinosaurs has to die in order to free the way for young, strong, energetic wolves who will lead the pack... " - this what is recession is above - to clean the market and economy, so, it can develop further. If there is a demand on a product and a company producing it go bankruptcy then somebody will fill this place and will lead the economy. If there is no demand on a product then nothing and no bailout money will help.

Stock Market Crash Stages

As was mentioned before (see my "Side Way Market in May" post) the indexes continue to move in the corridor defined by May 8, 2099 high and May 13, 2008 low. Now, the indexes are close to the upper edge of this corridor: the Nasdaq 100 index has hit this level yesterday, the S&P 500 is still about 10 points below this level and the Dow Jones Industrial is approximately 70 points below.

Only one nice trading session is needed for S&P 500 and DJI to hit this level and if it is broken it could mean that we may see further move up. However, I consider that the odds of the bounce down again are still good. The stock market (when I mention stock market I assume the main U.S. indexes which associated as market barometers: DJI, S&P 500 and Nasdaq 100) has been in a sideway move only for a month. To see the picture better, I may recommend checking higher timeframe index charts - from 1-year to 7-year views.

From the higher timeframe charts we may see that the stock market has been in recovery for 2 months (from the beginning of March to beginning of May 2009) and the whole May the market was basically flat. By comparing recovery after 2000-2002 stock market crash to the current recovery I may say that:

• The recent stock market crash was stronger;
• We had 3 bounces from the bottom in the previous recovery: August 2002, October 2002 and February 2003 (war in Iraq was lunched). We had 3 bounces from the bottom in the recent crash as well: October 2008, November 2008 and February 2009;
• The first recovery wave in 2003 was 3-month long and then the market was in 2-month flat stage. The current move up was 2-month long and we see market in sideway move for a month only;
• In 2003, after 2-month of flat stage, the stock market went up again.

To better understand the stock market crash, recovery process and what could be expected next, I would divide the stock market crash into the following stages:

• Recession: The market is heavily overbought and it starts to move down. As a rule this move down is prolonged in time and this move down is not very scary. See period from July 2007 until May 2008 and period from August 2000 until March 2002. In this period a many investors start to sell, yet there are still investors who buy.
• Crash: As a rule during the recession the bad stuff about companies and economy is revealed and depending on how bad "the truth" is we have strong or extremely strong panic selling. The recent "discovery of truth" about financial companies' manipulation was much scarier than the "discovery of truth" about internet bubbled companies in 2000-2002. In this period we see panic selling - everybody selling and only small part of investors buy. In this period bad, weak and "fraud" companies go bankruptcy and good companies become under evaluated. This period is short and drop down is strong.
• After Crash Clean-up: The market still can go down and we may see bounces from the bottom. In this period investor are still selling, yet, the panic is not as strong as it was during the crash. Many investors (professional traders who see under evaluated companies) start buying attracted by low bargain price, yet, the number of Bullish traders is not big enough to reverse the trend. During this period we still may see "bad" companies go bankruptcy, yet, it's not very scary since, usually, it is an expected bankruptcy and many traders are already prepared to that. For this stage I would refer to periods from July 2002 until February 2003 and from and from October 2008 until March 2009.
• First wave of recovery: There is no panic selling any more. There are still sellers, yet, the number of buyers attracted by low price of good stocks become quite big to move stock market up. Even if we see bankruptcy during this period it will not affect strongly up-trend because all the "bad" companies were already removed from the major indexes. The companies are still under evaluated, yet not as strong and we start to see positive signs in the economy. At the end of this period we may see sideway move or small correction. It could be strong up move in short period of time: see periods from March 2003 until June 2003 and from March 2009 until May 2009.

As I understand (I could be wrong), we are at the end of the "First wave of recovery" and we still may see side-way market or even some drop down (automotive clouds are still on the "stock market sky").

In my next post I'll go back to the shorter term index charts (S&P 500, DJI and Nasdaq 100 charts) to show what my technical analysis tells about shorter-term trends and current market sentiment.

Sideway Market in May

Just a quick and short follow up after my "S&P 500 Chart" post on May 24, 2009. I was somewhat bearish, yet we had strong up move yesterday based on the economic data (see "Economic Calendar" I have mentioned about sensitive levels at the May 13, 15 and 21 lows (see lower blue line in my previous post) and we had bounce up. Today we had a decline again and, now the S&P 500 bounced down from the top sensitive level (see top blue line in my previous post). The indexes has become a little bit more volatile over the past few sessions which mean more close attention should be given to the intraday charts or more conservative approach could be taken to stay in cash until a trend is defined more clearly. The market has been flat since beginning of May 2009 (see 1.5-year chart view) and there is a serious danger of having strong correction (see higher timeframe charts).

S&P 500 Chart

Another week is behind. The stock market is doing what it supposed to do (in the meaning of my technical analysis results). The main U.S. indexes (Nasdaq 100, S&P 500 and DJI) followed the pattern defined in the "S&P 500" post on May 14, 2009 and in the "S&P 500 Analysis Follow Up" post on May 18, 2009. In particular, the indexes moved up - back to the May 6-8, 2009 highs, but did not break those levels. Then the indexes have dropped down again.

Now, the same traditional question that bother all trader: "Up or Down?" The answer on this question could be different depending on the personal trading style. If you are long-term trader and expect to stay in position for years then you could be looking for the answer in long-term charts, in the analysis of the economy and fundamentals. On the other hand if you are short-term ETFs (Exchange Traded Funds) trader could be looking for the answer in the technical analysis of the short-term index charts.

I am not here to discuss long-term analysis of the U.S. stock market, and I am not here to say where the market is going to be on the next trading day after the market open. I usually do one post a week where I am trying to cover technical analysis of the 60-day (hourly, 1 bar = 1 hour) index charts. Depending on the market volatility these charts are covering 2-5 days trends, and even I do not trade these charts (I’m short-term trader) I use them to see the general sentiment of the indexes and accordingly adjust my trading strategy.

Coming back to the traditional chart setting you may see in my blog, I may say that the majority of the technical indicators on the S&P 500 index are Bearish. The similar tendency could be noted on the Dow Jones Industrial index. The Nasdaq 100 is not as bearish as S&P 500 and DJI, yet, still negative. I would not make a statement that the indexes are strongly bearish. There are some bullish indicators could be seen as well.


From the chart above you may see that there is some dominance of the bearish sentiment. It is not a strong dominance: the currently bearish indicators have been bullish on Friday May 23 almost whole trading session and has become bearish only by the end of the day (you may see RSI and Stochastics started to move down again). One of the main reasons why I would shift the odds in a favor of bearish move is because of the volume surge at high price on May 20, 2009 in S&P 500 and DJI sectors. We do not see such high volume on the Nasdaq 100 index, however, we have not seen a high volume on the Nasdaq 100 during the price decline on May 13, 2009 neither.

Even my technical analysis is somewhat bearish at this moment, I would still keep my eye closely on charts since the indexes are close to the May 13, 15 and 21 lows (see lower blue line on the S&P 500 chart above which mark shorter-term sensitive level) to see if this line is going to be broken.

Again, my technical analysis is subjective and reflects my personal view on the market. I may only recommend doing your own personal analysis which would fit your personal trading style.

S&P 500 Analysis Follow Up

A few days ago on Thursday May 14, 2009 in my "S&P 500" post I have mentioned about good odds of the indexes rallying back to the May 8, 2009 highs ("I use in my technical analysis are bullish and point to the good odds of the further recovery"). In the same post I expressed my hesitation about indexes breaking these highs. Now, the Dow Jones Industrials index came close to its May 8, 2009 high. The S&P 500 and Nasdaq 100 indexes are still  below.

We had a nice recovery today, yet, I am still staying on my position, expressed in my previous post, that I would not expect to have May 8 highs easily broken. Yes, my technical analysis (my technical indicators) is bullish at the current moment, yet, I would still consider that this is important to keep an eye more closely on the charts over the last couple of trading sessions.

S&P 500

It has been for a while since I post a chart in my blog. I usually do not do any technical analysis posts during the week (as a rule I do it on week-ends), yet, I'm just have time to put a few notes. By referring back to my previous week "Industrial and Financial Sectors" post where I mentioned about a possibility of shifting in supply/demand balance which may lead to the dominance of bearish sentiment on the market and as a result to the correctional move down, I may say that this week we saw this move. The strongest drop has been noted in the Nasdaq 100 sector. Actually this was the strongest Nasdaq 100 index drop since March 9, 2009 (reversal day - see my "DJI Chart" post on March 1, 2009 where I predicted that reversal). I cannot say it about DJI and S&P 500 indexes, on the other hand these indexes did not run up as high as Nasdaq 100.

Today we had a positive session - some recovery after the down turn. There is always a traditional question: What is next? Will market go up? or will it drop further down? From the S&P 500 chart below you may see that majority of the technical studies I use in my technical analysis are bullish and point to the good odds of the further recovery. The last Bearish volume surge in the S&P 500 and Nasdaq 100 sectors confirms it. However there is a few factors that make me hesitate about expectation of a strong recovery. There are a some of them:

1. I have not seen Bearish volume surge (volume surge during the price move down) in the Dow Jones Industrial index;

2. Since March 9, 2009 the market has been moved strongly up and we have not seen any strong correction;

3. The first correction during the 2 month recovery was at the end of March 2009. This correction was not a strong one nor a prolonged one. As a rule second correction should be stronger because it is further from the March 9 bottom and market become more overbought as it was in March;

Because of that, at this point of time, even if I see further recovery I would not expect the market (indexes) to go higher than May 8, 2009 highs. At the same time I would more closely watch the intraday charts since there are good odds we may see market reversed down again. The good news is that is that volatility goes down: VIX (volatility index) moving lower, ATR (Average True Range) is moving down as well (I monitor them on daily chart). That tells that it is very unlikely to have crash down. Stock market becomes more quiet and if we see correctional move down it should not be a dramatic movement.

ETFs Trading

ETFs (Exchange Traded Funds) was launched in 1993 with introduction of SPDRs (ticker: SPY) that tracks the S&P 500 index. Still SPDRs remains as one of the most traded stock (not just exchange traded funds) on the U.S. stock market. ETFs should always be look at as funds that could be traded as.

To see advantages of ETFs trading the one should compare them to mutual funds trading first and then to stock trading. By comparing ETFs to the mutual funds we may see that:

1. Intraday Trading: Mutual funds are always traded at the market close once a day and no matter when you place order to buy/sell mutual fund your order will be filled at the same time (at market close) and at the same price as orders of all other investors. Exchange traded funds could be traded as stock and you can purchase or sell them during the market trading hours. The ETFs provide investors with intraday trading flexibility of stocks which allow benefiting from the intraday price movements;
2.  Ability to Sell Short: As a rule when you invest into mutual funds you buy them - you cannot sell them short to open a position. For this purpose you have to look for inverse or Bear funds. That means that you have switch between bull and bear funds or participate in trading only in Bull markets (as a rule only index funds has inverse funds). In case of ETF, as was mentioned above, you trade it as stock, furthermore, you may sell it short and participate in Bear markets as well without looking for additional trading vehicle. Because of that, ETFs provide investors with wider range of speculative trading strategies in comparison to mutual funds;
3.  Low Cost: Exchange traded funds are considered as cost efficient trading tools. Because of their low cost a lot of professional and retail investors chose them for investments.

By comparing ETFs to stocks we may see other three points:

1.  Diversification: When you purchase a single share of ETF you invest into all stocks from the basket of the index this ETF tracks. For instance, by buying one share of QQQQ at $40, you invest into all 100 companies listed in the Nasdaq 100 index. Try to imagine how much it would cost you to buy one share of each company from the Nasdaq 100 index in order to get similar diversification;
2.  More conservative than stocks: The ETF price cannot drop to zero, ETF cannot be broke and it cannot file a bankruptcy. If you see it then this is The End. Index listing is managed by professionals: weak companies are reviewed on a regular basis and when it is necessary are replaced by the stronger companies. In case of DJI the listing is managed by “Wall Street Journal”, in case of S&P 500 the listing is managed by Standards & Poors, Nasdaq 100 index is managed by Nasdaq OMX, etc. They basically do portfolio selection and all fundamental analysis instead of you;
3.  Easier to analyze: By having several stocks in your portfolio, it could become complicated to analyze them. You have to do some fundamental analysis for each stock, look at chart and do some technical analysis and in addition it is recommended to analyze indexes that cover your stock to see your industry and whole market general trend. It could be quite complicated and time consuming. The ETFs analysis is simpler and very often it could be narrowed to technical analysis of indexes only.

As you may see that ETFs have become very popular because they attract mutual fund investors by their low cost, tax efficiency, saved features of the mutual funds and obtained flexibility of stocks. At the same time ETFs attract stock investors by their ability to diversify portfolio, simplified analysis, protection from bankruptcy. I may say that it is easy to understand why ETFs has become the most popular trading vehicle among all type investors, including large institutional investors, small speculators and active traders. Exchange traded funds have become very liquid (you may sell and buy them very fast) which is another important advantage. Some of the most traded ETFs are: SPY (tracks the S&P 500 index), XLF (tracks the S&P Financials), QQQQ (tracks the Nasdaq 100 index), DIA (tracks the Dow index), IWM (tracks the Russell 2000 index), etc.

Best Technical Indicator

Which is the best technical analysis indicatorket?

I would recommend those you know the best, but not more than 3 technical indicators. In addition I may recommend using ADX and ATR – not to generate signals but to recognize different market stages and adjust indicators setting accordingly. On my opinion majority of technical indicators works well. A trader just need to know what market he/she is trading is: is it strong trend, is it flat market, is it volatile or quiet. As a rule ATR and ADX gives this picture.

Industrial and Financial Sectors

Just a short post. Today's daily volume on the S&P 500 index is the biggest volume over the last 2 months. Taking into account that this volume surge has been noted during the price advance I would assume that we may possibly see the shift in the supply/demand balance. Similar situation could be seen on the Dow Jones Industrial index. The Nasdaq 100 index does not have such high volume surge, however, this index has been moving flat for the last three trading sessions. Comparing different market sectors I may say that the highest trading activity could be read in the industrial sector ( DJI, Nasdaq Industrials, Nasdaq Capital Markets). I can see high volume in the financial sectors as well - Nasdaq Banking and Nasdaq 100 Financial - yet not as big as in the industrial. Other stock market sectors (DJI,DJU, Nasdaq Internet, Nasdaq Computer) have relatively smaller volume surges or do not have increase volume activity at all.

I do not know why we can see increased trading in the industrials and financial sectors. It could be because the investors are waiting to see Chrysler bankruptcy and how it will affect automotive market, or those investors who bought in February decided to pocket a profit or it could be something else. I know one thing - such big volume means that big number of investors (or small number of investors with big money) started to relocate their investments and that may lead to the change in the supply/demand balance and as a result to a change in the stock market sentiment.

I would personally watched very closely stock market over the next couple of sessions to see how the market will react on this volume. I am not telling that the market will drop tomorrow, it could continue to move up, however I would prefer to stay in cash for now. Maybe I'm wrong and maybe I'm loosing opportunity to make some profit, yet, I consider there are moments when it could be useful to stop and monitor for a while in order to see the development of events - in current situation development of reaction on this high volume.

Index and Stock Trading

I consider index analysis as one of the most important element in any trading system. A trader should know the general market trend and only index analysis can help with this. I would say there are 2 main points in the index analysis that should be used for stock trading:

1. Analyze DJI and S&P 500 indexes to see the general market trend – you do not want to trade against the general market trend, especially if you mid- or long-term trader. If based on the S&P 500 and DJI technical analysis you may define whether the economy is in the recession or on the rise, then you have to build your investment strategy in accordance to this. You do not want to see your pension funds, other long-term and mid-term investments in the long position if the market is in the recession. At the same time it would be wrong to stay in cash if you see the stock market in recovery and up-trend.
2.  Analyze the index your stock belongs to. If you trade stock of the of the internet company and this stock is covered by the Nasdaq Internet index I think it would be logical to take a look at this index to see the general tendency of all internet publicly traded companies. If you trade stock of the financial company, you may want to take a look on the S&P 500 Financial, Nasdaq 100 Financial or other financial indexes. It could be useful to know what is going on in the industry your stock belongs to.

In general there are only two rules based on the index technical analysis recommended when you trade stocks:

• It could be safer to stay in cash when result of the index technical analysis contradict to the results of your stock technical analysis stock;
•  It could be recommended considering opening a trade when signal based on the stock technical analysis goes along with results of the index technical analysis.

By embedding elements of the index technical analysis into a stock trading system you may substantially reduce the number of trades, however I would consider it more conservative trading.

Index Technical Analysis

Another week of almost flat market is behind. The Dow Jones Industrials is only 1.7% up from the previous week close, the Nasdaq 100 index gained 1.7% up as well and the S&P 500 index moved only 1.3% up from the previous week close. It would be wrong to say that this is a positive market; as well it would be incorrect to call this market Bearish. Starting from the April 2, 2009 the DJI index is in almost flat market (see my previous "S&P 500 Chart" report on April 25, 2009). The S&P 500 index did start to move side-way on April 9, 2009 - almost a month ago as well. The Nasdaq 100 index that was less affected by the recession (no financial stock in this index listing) was one of the most Bullish indexes, yet, still almost flat.

So what is going on the stock market from the technical analysis point of view? The stock market has been extremely oversold in all terms during the recent recession. In additions many of the stocks (companies), because of the crisis in the financial sector, were traded below its actual value (they were under evaluated). As a result we had strong recovery movement in period from February 9, 2009 until April 9, 2009. Any strong movement up leads the market into at least short-term oversold condition when the first wave of the investors who wanted to invest into underpriced stocks become exhausted and the second wave of the investors is not coming very fast to keep up-trend moving. For further healthy recovery the stock market needs to be released from these oversold conditions, attract more investors and that is why healthy bullish market supposes to have corrections.

We had one month of up-move and now we have one month of side-move. The same as last week I would say that I’m still in bullish mood, still I may consider possibility of some correctional movement down. Even if my technical analysis is correct and we see drop down, I would not expect it to be strong and prolonged in the time, but rather shallow and short lived.

There are several factors that make me believe in that:

1. Over the last month, by looking on the short-term index charts I may say that according to my short-term technical analysis the indexes very actively reacted on every (even small) volume surge to the index downside by immediate reversal up-move.
2. From the same short-term technical analysis I may say that there were number of occasion when bearish signals were ignored and price continued to move flat or up.
3. The stock market started to ignore negative news. Even we hear and see every day complains about swine flu and Chrysler bankruptcy and TV financial "gurus" are making statements that it negatively affects the market – we still have not seen any strong movement down.

This is one of the characteristic of the long-term bullish market when the majority of investors ignore bearish signals and negative news. In opposite every positive news and bullish signal attract investors to come back into the market and start to invest by buying.

S&P 500 Chart

Did not post any charts lately. In my previous "Simple Technical Analysis" post on April 12, 2009 and "S&P 500 Volatility" post on April 5, 2009 I have mentioned about possibility of the indexes stacking at the levels where the market spend a lot of time in side move. I called those levels sensitive levels. Below I have set 2 charts of the S&P 500 index: 60-day (1 bar = 1 hour) and 1 year (1 bar = 1 day) to show what I wanted to tell.

From the 60-day chart (see first chart at the top) you may see that almost whole April the indexes basically were in the side move. The Dow (^DJI) index was the first index that started to move side-way, then a week later S&P 500index followed this pattern and the Nasdaq 100 index, as always, still could be considered in the up move. From the second 1-year chart (chart at the bottom) you may see that theS&P 500 index stopped its recovery at the same levels where it was in a side move in period from the middle of January to the middle of February 2009. The DJI index stuck somewhat lower and the Nasdaq 100 run over those levels.

Those traders who are more than a year on the market has to know that in the majority situation the indexes are flat in the resistance and the support as a rule is sharp. It could be easily explained by simple fact that greedy buying usually spread over the time while panic selling is always sudden and sharp. Because of that I believe many of technical analysts are asking: "we were in strong recovery… now we are flat… What is the next? Reverse down?"

The answer on this question, I think, lies in the technical analysis of the longer-term trend. If according to the longer-term analysis we are not any more in the recession I would assume that the odds are still on the side of the recovery and we may see some decline after this side-way move and then resumption of the recovery. We already had similar situation from the middle of June 2003 until the end of August 2003, when after strong recovery stock market has been flat for 2 months and then it went back into up-trend for the next 7 months. As I repeatedly mentioned, the stock market cannot move up all the time. During the recovery (or up-trend), time on time, stock market has to release itself from shorter-term overbought conditions. This is exactly what we have right now on my opinion.