Short Analysis

I have missed my Sunday post, therefore I'm writing during the week. Coming back to my previous "S&P 500 Technical Analysis" post on September 20, 2009 I may say that since then we have had the market (Nasdaq 100, S&P 500 and DJI indexes) moved as was predicted: sideway trading first (from September 21 until noon on September 23) and then a correction down.

Looking at the price movement it looks like the correction down is coming to the end – the indexes are moving up from their September 25 lows. However, taking a look at technical indicators I do not think that many traders see positive and promising signals. Right now my technical analysis on hourly charts shows following:

1. SBV (Selling Buying Volume) – bullish on the Nasdaq 100 and DJI and neutral on the S&P 500;
2. MVO (MarketVolume Oscillator) – the same as SBV bullish on the Nasdaq 100 and DJI and neutral on the S&P 500;
3. Advance/Decline Oscillator could be considered Bearish, yet close to the oversold levels on all main indexes (Nasdaq 100, S&P 500 and DJI);
4. MACD is neutral by moving basically sideway;
5. RSI and Stochastics reading are mixed, yet, I would say that they are more Bearish than Bullish;
6. McClellan Oscillator started to decline, yet, it is still positive.

As you may see the technical analysis is mixed at this moment and may suggest recovery from the correction as well as further developing of a deeper correction. The main point that makes me worry, despite positive volume signals, is that volatility is increasing. You may see that ATR (Average True Range) and VIX index are climbing up and this is a bearish sign.

As a rule in case like we have now (mixed technical analysis results) a good decision could be waiting for more clear signals. Right now the indexes clearly defined the resistance line: for S&P 500 and DJI indexes high levels on September 17, 18, 22 and 23 and for Nasdaq 100 high on September 23. At the same time we may draw some support line that would go through September 25’s low. Furthermore, conservative way could be waiting for indexes breaking one of these lines and checking the technical analysis at that point.

S&P 500 Technical Analysis

A week ago in my "Technical Analysis" post on Sunday September 13, 2009 I have pointed to a bearish sentiment and overbought signals on majority of technical studies. However, in the same post I mentioned: "As a rule, when market comes to some overbought level it is stuck at this level for a couple of trading sessions and moves side-way before a decline." As you may see the history analysis helps in making a correct decision not rushing into a short trade even in situation when technical analysis is in favor of a correction. In one trading session, on Thursday September 15, 2009 the stock was back in the up-trend. On that day (September 15), all technical indicators on the Nasdaq 100, S&P 500 and DJI turned from bearish into bullish.

Now, by the end of this week we have a similar picture. Again, many of technical studies on the Nasdaq 100, S&P 500 and DJI charts point to overbought (short-term) levels and bearish sentiment. And again, I would recommend taking look through the history of these indexes. You should see that in the resistance (before a correction) we have a few sessions of sideway trading. In opposite an exit from a support is sharp and strong. This is not a 100% rule, yet, I would say that the odds of having a sideways trading in resistance are quite high.

The last two weeks’ rally up (from September 3, 2009) has push the stock market and indexes into overbought condition ( for a short term at least). A correction down would be healthy for the market. However, a possibility of sideway trading still exists and personally I would watch the Nasdaq 100, S&P 500 and DJI indexes for stronger bearish signals.

Right now the technical analysis applied to hourly charts shows following:

1. High volume surge on September 15-16, 2009 during the price advance (see big green MVO) suggests a possibility of reversal down.
2.  The RSI (Relative Strength Index) and Stochastics have dropped below 70 and 80 lines respectfully and both these indicators are in decline which is a bearish sign.
3.  The Advance/Decline Oscillator declines and is close to the center (zero) line. This could be considered as a bearish signal as well.
4. The MACD moves up, yet, this move is almost flat. Even this indicator is bullish, it’s not a strong signal and it could turn into bearish signal very easily.
5. The SBV Oscillator declines slowly which indicates bearishness, yet, it is still has high positive readings. It would be nice to see it dropping closer to zero line before considering it as a strong bearish signal.
6.  McClellan Oscillator is neutral on the Nasdaq 100 and S&P 500 indexes - it moves flat at a zero line. However, McClellan Oscillator applied to the DJI index is positive (above zero line and in flat move).
   

The S&P 500 Chart with elements of technical analysis.

Stop-Loss Trading Strategy

Many traders face a question what strategy to use in order to protect portfolio from big losses. In most cases this question is narrowed to a selection of a stop-loss strategy. A stop-loss strategy choice is very important, yet, is very confusing and can put even an experienced trader in a corner. The problem is that there is no straight answer on what system to use. A stop-loss selection completely depends on a selected trading vehicle, a personal trading style, risk tolerance, invested money and in addition it depends on the stock market itself.

I will try to go through some of the factors that may affect the stop-loss strategy.

1. Selected Trading Vehicle: Depending on what you trade, a stop-loss would be different. If you are buying and selling stocks 2-5% stop-loss could be sufficient for your trading system. However if you are buying options then 2-5% stop level could be hit very easily and you could be willing to look for 20-50% stop-level. If you trade uncovered options you could even think about setting stop-loss above 100% of the premium received. Even if you are trading stocks the stop-loss level could greatly differ from stock to stock. More volatile stocks would require bigger-stop-loss than the less volatile stocks.

2. Personal Trading Style: There are different trading system and different trading styles. Some traders are buying equities for long-term investments of pension funds and they make one trade per one-two years. These traders could be ready to set stop-loss to 10% and above. On the other hand a short-term trader who makes 5 trades per week may not be willing to risk setting stop-loss bigger than 1%.

3. Risk Tolerance: Twenty years old trader may lose everything and he/she still will have time to make some money and come back to trading and investing. However if you are close to retirement you should know the edge when it is better to get out of a game. If you are seventy years old you could be willing to set tighter stop-loss than.

4. Invested Money: If you have only $2,200 on your account and you invest all of them on margin ($4,400) in one trade, your stop-loss should be below 5%. Otherwise you risk losing more than $200 in a single trade and you may lose your ability of trading on margin. At the same time a trader who invest a $1,000 into a trade and who has $100K on the account could be ready to lose all 100% of the invested money (all $1,000).

5. Stock Market: The market condition is the most important factor that many traders skip. The market has periods of different volatility. During a steady uptrend, as a rule, the market is less volatile than during a recession and the market is extremely volatile during a stock market crash. It is logical to adjust a stop-loss trading strategy to the market volatility. It is unusual situation when the long-term uptrend (when market is less volatile) to see bigger than 2% DJI index moves within a single session. Furthermore, a short-term DJI trader would be looking for tighter than 2% stop-loss. At the same time, during a recession when market is more volatile the odds are very good for bigger than 2% DJI moves up and down within a single session and the same short-term trader, who is brave enough to trade in volatile market, could be willing to consider less tight stop-loss.

As you see stop-loss selection is not as easy as it seems from the first view. A lot of factors should be considered and there is no straight answer. Each trader has to find it out by him/herself. A trader should not copy any other trader - what works well for one trader does not necessary will be good for another trader. You can and you should look what other traders do, but not mimic them. If you decided to use somebody's style, learn it first and then use your knowledge to build your own trading strategy or adjust existing one to you personal trading needs. Do your own homework and do not think that your trading system is invincible and you will never have a negative trade.

Technical Analysis

Nice week. As all indicators were bullish last Friday (see my last week "Volatility" post on September 6, 2009) the stock market rallied up strongly. Now taking look at hourly charts we may see that majority of the technical indicators started to show some bearish signs:

- McClellan Oscillator declined below zero line - bearish sign;
- Stochastics and RSI dropped below 80 and 70 lines respectfully - bearish sign;
- MACD declines - bearish sign;
- Advance/Decline Oscillator declines - bearish sign;

I think closed attention should be paid to the high MVO on September 8-10, 2009. This indicates high volume activity during the price advance. As a rule such high volume could reverse a trend and we already saw slow down in up-move.

The SBV Oscillator is the only indicator that could be considered slightly bullish. It declines, yet, the SBV reading are still at high positive levels.

Overall, taking a look at technical analysis applied to the hourly charts ( see my previous posts for hourly charts setting) I cannot say that the market is very positive. In opposite, there are many signs that suggest a correction down. However, we have just had a strong rally. Taking look at the history I do not see many occurrences of sharp reversal after such up-move. As a rule, when market comes to some overbought level it is stuck at this level for a couple of trading sessions and moves side-way before a decline.

Volatility

In my previous post on August 30, 2009 ("Swing in Trading")  I have talked a lot about swing at the market open on August 28, 2009 by encouraging everybody to take a look at history to see what usually happens after such spikes in price during a side-way trading. I think, now, those who did not have chance to take a look at history understand what message I wanted to deliver. The massage was that this is important having access to historical charts. Ability to see the past gives you a tool to compare present price movement to the past, find similar patterns and act accordingly. I think the correction down we saw at the first half of this week (after my post) is the best witness of my words.

From my communications with other traders I know that many of them ignore analyzing history. The most popular way of trading is to take the most popular technical studies, apply the most popular setting and use the most popular trading strategies to generate signals. No offence, but personally I call it "gambling". With the same success you may go to casino.

The last person I communicated called himself an "experienced trader" and he was upset that a technical indicator does not work as it is told in the book… Again, no offence, but my answer is bs. This is great that people read books, go to the universities and receive education. However, real life, real job and real trading differ a little bit from what you read in a book and study in the university. Books and university gives you general knowledge and basic tools. However in real life, on real job in real trading you have to adjust what you learned, improve it and learn how to use it on practice. If you do not do it then you always going to be upset that a technical indicator does not work as it is told in the book and blame everything around in bad trading signals.

Most technical indicators were introduced 20-30 years ago, when nobody had access to intraday data and intraday charts. Most of the mentioned in the books setting for technical studies are for daily data and long-term trading. It is not a good idea to use the same indicators setting in intraday trading. It simply does not always work. When you look at 10-year chart you may ignore the market volatility because in 10-year frame you see market decline, market crash, recovery, up-trend, etc. Basically, you see different markets with different volatility in one time-frame. When you dig into intraday charts you cannot ignore volatility. On intraday levels, price trend acts differently in down-trend (high volatility), during the crashes (extremely high volatility), recoveries (middle volatility) and up-trends (low volatility). Respectfully, on intraday level a technical indicator setting should be adjusted in accordance to the market condition.

The simplest way of adjusting a technical indicator to the current market is

1. Find in the history periods with similar to the current market volatility and similar longer-term trend.

2. Find out what indicator setting would work best for you in those periods in history.

3. Try to apply the same indicator setting in current market.

In my understanding, the history is the strongest weapon in the arsenal of a trader and the most important component in technical analysis.

I think, I went out of my weekly posts topic. Coming back to it - see below the S&P 500 chart with the sentiment on technical studies I track. By the end of the week all technical indicators are bullish. The Nasdaq 100 and DJI technical analysis results look the same which is a good sign. There is still a room to the upper sensitive level.

The S&P 500 Chart with elements of technical analysis.

Swing in Trading

The last week of August was flat. The indexes already were in the side-way trend during the first two weeks of August - see the S&P 500 chart in the "S&P 500 Analysis" post on August 16, 2009. Then we had some up-move and again a week of side-way trading.

The indexes did not run far above the corridor I draw in the same post "S&P 500 Analysis" post. The Nasdaq 100 index is moving just above the upper level of the sideway corridor we saw in the beginning of August. The S&P 500 is about 20 points (2%) higher and the Dow Jones Industrial index is about 120 points (1.5% roughly).

It looks like the strong recovery we witnessed in period from August 18 until August 21, 2009 has become exhausted very fast. If by the end of the last week we had positive sentiment on the market (see my "Short Technical Analysis" post on August 23, 2009) then now I would not bet on it. I mentioned a week ago in the same post that if we have flat market we could be considering of a possibility of a stronger correction down as we did it during the first two weeks of August.

Especially what makes me worry is Friday’s trading – on August 28, 2009 we had strong positive opening and then similarly strong decline. If you have access to historical charts I would recommend you scrolling charts back in history for side-way moves and swings above all resistance levels and back down during those side way moves. I could have only one explanation of such move – there were stop-loss orders of Bearish traders just above resistance levels and because stop-loss orders are considered by the market as a demand to buy (to cover short position) the market did not hesitate to hit those levels and fill orders of other Bearish traders who was not in the position and wanted to sell at higher levels. Because the Friday’s strong opening was not supported by Bullish traders, the pressure of Bearish traders pushed the indexes back down. I hope my explanation is not very complicated, just take look at historical charts and check what usually occurs after such swings during a side-way market.

Coming back to the technical indicators on hourly S&P 500, DJI and Nasdaq 100 charts I traditional discuss in my weekly posts, I may say that by the end of the week:

• SBV is neutral – it is flat around central zero line;
•  Advance/Decline oscillator is positive – it advances after hitting low negative levels;
•  MACD is bullish – it moves up and just crossed zero line;
•  RSI and Stochastics are moving up which is positive sign, however they did not hit oversold levels. Furthermore, I would say that these indicators are only slightly bullish;
•  McClellan Oscillator is negative, however it shows some positive sign by starting to move up.

Overall technical analysis of the hourly index charts is positive, however I would not expect strong up-move and would monitor charts for changes in the sentiment.

Short Technical Analysis

Last week on Sunday August 16, 2009 in the "S&P 500 Analysis" post I have discussed the possibility of correction down. We had strong move down during the next 2 days (Monday and Tuesday). However, that was the only decline we had. The rest three days of the week we had strong recovery. It was strange exit from the correction. As a rule an end of a decline should be market by a volume surge, however it did not happened in this case. Still, on Wednesday majority of technical indicators became bullish and on Thursday's mooning all studies you may see on my chart snapshots (see my previous posts) were strongly bullish.

Now, the indexes run over the upper line of the sideway corridor they were in August. For many traders this could signal a beginning of a new possible up-move. As I mentioned before we are in the period when all news and reports are positive simply because the claimed at the end of 2008 expectations for 2009 were purposely lowered in fear of recession continuation. As a result, this positive news could continue to push market higher.

However, this is not my job to analyze news and all other economical factors that drive the U.S. economy. I do technical analysis and I follow technical indicators. If the results of technical analysis suggest up, I say "Up" if technical analysis is bearish I say "Down". In some cases there could be unexpected turns, however, for such occasion w have trend-following technical studies (lagging indicators) and we have higher timeframes that help us to define when it’s time to cut losses.

So, coming back to the charts and technical analysis I may say that by the end of this week the majority of indicators I use are still Bullish:
 - advance/decline oscillator is at high positive levels and is moving up;
 - RSI is above 70;
 - Stochastics is above 80;
 - McClellan Oscillator is almost flat and is at high positive level;
 - SBV Oscillator is positive and is at high levels which is a Bullish sign. However, it started to decline which shows some weakness;
 - MACD started to decline as well, yet it is still positive.

So far the only danger for the further up-move is high MVO on August 19-21, 2009 in the Nasdaq 100 sector and on August 21, 2009 in DJI sector. High MVO indicate high volume activity (volume surge). Volume surge during the price advance indicates greedy buying and strong greedy buying may reverse a trend. However, we do not see high MVO in the S&P 500 sector which is a positive sign.

Overall, my technical analysis suggest higher odds of further recovery, however, I would closely monitor charts over the next week. If I see flat market again I would say we could be back where we were in the first half of August – consideration of a possible strong correction down.

S&P 500 Analysis

It is 3 weeks as I posted a chart in my "S&P 500 Rally Up" post where I pointed to the overbought condition of the market and expressed a possibility of sideway move that may turn into a correction. Since then the Nasdaq 100 and many other indexes have been moving in sideway corridor. The S&P 500 and Dow Jones Industrial (^DJI) indexes pushed by Financial and Housing sector (see my previous week "Financial Sector" post) started their sideway move a week later on August 3, 2009.

Now, when it looks like financial sector is not pushing S&P 500 and DJI indexes up and is not holding the rest of the market in sideway corridor we may ask: "could be expect a correction down?"

There are always two answers in stock market technical analysis: a) market can go up, and b) market can go down. So I decided to summarize a few points that favor those answers  from my prospective.

In favor of up move:

1. In some cases when the market is in sideway corridor for a prolonged period of time it can release itself from the overbought condition it was when it entered the sideway corridor. Furthermore, I would say that the Nasdaq 100 and some other indexes are not as overbought as they were on July 23, 2009. We saw some negative money flow on those indexes and they do not need a strong correction down to resume a recovery.

2. The stock market is far from its crash bottom and we will continue to have good and positive economic reports as we had over the last month. At the end of 2009 the public companies and economists “purposely” have set their expectation levels too low (they expected further crash and weak market). As a result, now, and I think for the prolonged time we will have good economic reports that will "exceed expectations" and these good news may push market, indexes and stocks up.

In favor of down move:

1. I think the stock market is still overbought after its last rally up.

2. The volume surge on August 5-7 in the S&P 500 Financial sector is very big and could mark end of the rally in this sector. The Nasdaq Other Financial index that represents smaller financial companies is already almost 5% down from its top on August 7, 2009.

3. If the “Health Care Reform” gets green light we may see investors pulling money out from the health insurance companies.

There could be other points, yet, coming down to the technical analysis on chart I may say that the sentiment is more Bearish. Majority of technical indicators on S&P 500, DJI and Nasdaq 100 indexes suggest negative trend (see S&P 500 chart below). Still, on the same chart you may see Bullish Stochastics and RSI. I would say, if the indexes break their lower corridor level that would confirm a correction and at this point of time more odds on this side. Yet, if the indexes run above their upper corridor border we may not see a correction at all.

S&P 500 chart with Technical Analysis of SBV, MVO,
Advance/Decline Oscillator, MACD, RSI, Stochastics and McClellan Oscillator

Nasdaq 100 Quotes

I like when the data are presented in user friendly way. See below example that I just found online. Even simple technical indicators could be useful if they are in the easy  to understand and analyze format. Source: NASDAQ 100 Quotes

Moving average sentiment is considered "Bullish" if moving average is above the last sale price of the NASDAQ 100 (^NDX). Respectfully "Bearish" moving average sentiment is read when moving average is below the last sale price of the NASDAQ 100 (^NDX).

NASDAQ 100 (^NDX) Quotes As of Friday, August 14, 2009*   Open High Low Last Change NASDAQ 100 (^NDX) 1623.49 1624.47 1596.95 1611.58 -17.07/1.05% Technical NASDAQ 100 (^NDX) Indicators NASDAQ 100 (^NDX) Simple Moving Average   Last Change Sentiment* 5-day Moving Average 1,612.99 -1.58/0.10% Bearish 20-day Moving Average 1,601.80 4.22/0.26% Bullish 50-day Moving Average 1,519.31 2.38/0.16% Bullish 100-day Moving Average 1,439.63 3.78/0.26% Bullish 200-day Moving Average 1,316.09 1.57/0.11% Bullish NASDAQ 100 (^NDX) Exponential Moving Average   Last Change Sentiment* 5-day Exponential Moving Average 1,615.05 -1.74/0.11% Bearish 20-day Exponential Moving Average 1,589.45 2.33/0.15% Bullish 50-day Exponential Moving Average 1,527.72 3.42/0.22% Bullish 100-day Exponential Moving Average 1,459.99 3.06/0.21% Bullish 200-day Exponential Moving Average 1,459.99 3.06/0.21% Bullish

Financial Sector

I my previous "Technical Analysis" post I have talked about a possibility of correction and we had a small one which does not feet very well into the picture. It's difficult to believe that 2-day small move down on August 5-6, 2008 is the only correction we are going to see after the strong up-move we had in July.

The technical analysis by the end of the week is positive, however, I would not bet on the strong up move. I would rather prefer to see flat market that may turn into stronger than we saw correction down. Still, technical indicators on all 3 main indexes I track (S&P 500 DJI and Nasdaq 100) are positive at this moment and favor further up move.

Mine main concern is the financial sector. If you take a look at S&P Financials, Nasdaq Financial 100 and compare them to the technology and other indexes you will see that for many indexes up-move ended on July 23-27. Many of the indexes are in the sideway corridor since then.Dow Jones Utilities, Biotechnology index and Health Care Index could even be considered in the down-trend since July 27-30, 2009. So, we may say that technology, utilities and other market sectors became overbought and were ready for the correction down in the end of July. Yet, the financial sector continued its rally up and helped to hold the rest of the stock market from the correction. I consider that this is the main reason we did not see a strong correction.

Now, I would like to ask: "What will happen when the rally in financial sector becomes exhausted and financial sector become overbought at least in a short-term?" To answer on this question I would have to find out if the rest of the market is still overbought or the other market sectors become less overbought or even oversold over the last two weeks. If you say that the other sector indexes become oversold or less overbought during 2-week sideway move and shallow decline, than I would say that we may see up move wile financial companies have a correction or sideway trend. If you say that non-financial indexes are still overbought (at least in the short-term) then I would say we may see nice move down.

Personally, I did not see a strong correction on any of indexes (market sectors) and I did not see any volume surges during the price decline over the last two weeks. That is why it is difficult for me to assume that the market is ready for further up move.

Mine main point, beside of mine personal opinion on the market trend, was to show that in some cases it could be useful to take a look at wider range of the indexes. Especially it could be useful when you are in situation when you see Bearish signals, but instead you have sideway market or even modest advance. So, do not be narrow and do not focus on what you trade only. In some cases, when the stock you trade does not move along with yourtechnical analysis it could be not because your analysis is bad, but, because your stock is under an influence of other factors that you do not see yet.

Technical Analysis

The recent week could be considered completely flat with the exception of sharp up-move at the market open on Thursday July 30, 2009. I have already pointed to the short-term overbought market in my previous week's "S&P 500 Rally Up" post. If not this Thursday's sharp up move then this week's sideway trading would look like very nice resistance and now all technical indicators would point to the higher odds of correction down. I reality the picture is a little bit different. The S&P 500 technical analysis of hourly chart (1 bar = 1 hour) shows following:

- The SBV Oscillator (bar period 20) is bearish - it moves down slowly. In addition big bullish volume accumulation from July 13, 2009 may possibly push the indices down.

- The MVO(5,25,3) is Bearish as well. We may see a row of Bullish volume surges with the most recent on July 30, 2009. All these volume surges are result of the waves of greedy buying. The strongest one on July 23, 2009 has halted advance and directed the Nasdaq 100, S&P 500 and Dow Jones Industrial sideway.

- The Advance Decline Oscillator with bar period 12 is close to become bearish. It started to decline, yet it still at high positive level and still could be considered as bullish.

- MACD(15,30,10) is bearish. It declines and it just crossed zero line and went into negative territory.

- RSI(17) dropped below 70, however, it is almost flat and still above 50. So, I would say the Relative Strength Index is slightly bullish.

- Stochastics (17) is slightly bearish. It declines, it moved below 80 yet it is still above 50.

- McClellan Oscillator with bar period 19 and 39 is bullish. It advances above zero line and is still in up-move.

The DJI technical analysis of the same indicators will give you the same result. The Nasdaq 100 hourly chart is slightly more bearish then the S&P 500 and DJI charts.

In conclusion I would say that the main U.S. indexes are overbought over the short-term. We may see some bearish signals. However not all technical indicators are in favor down move. It could be recommended to monitor chart closely next week. Should Advance/Decline Oscillator, RSI and Stochastics decline further it would increase the odds of possible correction down.

I’m sorry I have not provided chart snapshot today. I'll try to do it in my next post.

S&P 500 Rally Up

We had another week of strong rally up. The stock market already show short-term overbought levels last week. Still, the S&P 500, DJI and Nasdaq 100 indexes rallied up without any correction serious short-term correction down… It is not healthy when market goes up for a long time without any correctional movement.

The Dow Jones Industrials just passed its November-December 2008 highs. The S&P 500 index ran over those levels without stopping and is a few points below its November 4, 2008 high. The Nasdaq 100 index, not loaded by financial and automotive companies, run over all these sensitive levels and the next line for this index goes through March 2008 Lows – March 2007 Lows – April 2006 Highs – January 2006 Highs.

Yes, if we take a look at longer-term charts (7-year chart, 5-year chart, 3-year and even 1-year chart), we may see that technical analysis on them is bullish. Majority of technical indicators on these longer term charts are positive and show development of the longer-term up-trend. However, if you take a look at shorter-term charts (60-day chart and lower) you may notice that the indexes on those charts are overbought and at least short-term correction would be very healthy for the stock market. One of the rules of technical analysis is: the longer market goes up without a correction the stronger correction could be.

During the last two week of rally up we saw increased volume activity which would indicate greedy buying. It looks like Investors were running into the market on the positive reports – numbers have exceeded the expectations that "were purposely lowered at the end of the last yea". When this wave of greedy investors becomes exhausted we may face a possibility of strong move down. As a rule greedy buying does not stop suddenly and market does not reverse down sharply (in opposite to reverse up from down-trend), but we may see sideway move first. Actually, over the last two trading sessions we may see some signs of that.

So, over the last week we run into several occurrences when price based technical indicators on hourly charts (60-day chart) already signalled a possibility of the down-move. Even Advance Decline Oscillator and McClellan Oscillator pointed to a possibility of the correction. Only SBV(20) on the 60-day chart remained positive by showing the positive money flow. Below you may see this week chart and how technical analysis looks by the end of the week.

S&P 500 again

Nice week of positive market we had. The indexes reacted by a strong rally up on the big volume surge during the price decline on July 8, 2009. Now, we may see some picture opposite to the one we saw a week ago. Now, we have nice volume surge during the price advance (see green MVO).

Basically there are two main factors that should be paid attention to: high volume during the recent advance and the resistance line that is hit by the indexes (S&P 500 and DJI in particular).

Right now the indexes are at the same resistance levels they were in beginning of June, 2009. I will repeat what I mentioned in my previous “Volume Technical Analysis” post on July 15, 2009 that the current resistance line could be extended back to December 2008. The indexes spent some time moving around this line and then reversed down in December 2008 and in the begging of June 2009. Furthermore, this level could be considered sensitive to many long- and mid-term traders and there are good odds we may see indexes moving sideway at this level again with possible bounce down.

Second factor of high volume surge during the price up-move witnesses that the there is a possibility of overbought market (at least in short-term). This should halt the recovery and possibly may push indexes down again.

Regarding other technical studies you may see on my chart (see below) I may say that

1. The SBV Oscillator readings are still at high positive levels which is a bullish sign. However, we started to see some changes in the SBV direction, which would point to the beginning of changes in the money flow;

2. I have already mentioned about big green (positive) MVO that points to the high volume surge during the price advance. This volume surge may cause changes in the supply/demand balance and as a result it may lead to reversal.

3. Advance/Decline Oscillator is in the declining mode and is Bearish (it started to decline on Friday). From this we may say that, now, investors (traders) are not focused on the advancing stocks as they were in the beginning of the week. If the A/D Oscillator continues to decline into negative territory we may say that traders become more attracted by declining stocks.

4. RSI and Stochastics suggest overbought market. However, they are still bullish by moving above 70 and 80 lines respectfully.

5. McClellan Oscillator crossed zero line on its way down and this is a Bearish signal.

As you see, overall, my technical analysis is not Bullish. It is difficult to say that it is Bearish either. I would say that in short-term the indexes are overbought and we may see a correction down. Yet, some of the technical indicators are still Bullish and we still may see some sideway- and up-move prior to a correction. If the indexes (S&P 500, Nasdaq 100 and DJI) go flat I would watch the sentiment closely, since it may push sentiment into bearish mood.

Volume Technical Analysis

Those who follow my blog may notice that in most cases I write to my blog during Saturday-Sunday. Today, I just would like to make a short post to follow my Sundays "S&P500 Chart" post.

On Sunday I mentioned: "The volume surge on July 8, 2009 was quite big … since the middle of the May 2009 the average volume is down and in relation to this volume the volume surge on July 8 could be considered big. I would say that because of this volume, we may see up-move for a couple of trading session. If it happens I would recommend monitoring charts more closely."

Over the last three trading sessions we had a strong up move. Even I did not expect such strong recovery - it is good to see it. It is always good to make double return from what you expected. There is no doubt now that the volume surge on June 8, 2009 (that I pointed to) marked the reversal. Indeed the volume based technical analysis could be "money making machine".

Now, I would like to drag your attention to the resistance levels we saw indexes at in the beginning of June. I'm sorry, I do not post chart today (I'll try do it during week-end), but if you take a look on 1-year daily (1 bar = 1 day) chart of the DJI and S&P 500 indexes and extend these resistance lines you will see that the market had the same resistance levels in December 2009. Because the market indexes spent a lot of time around those levels I consider them very sensitive to many long- and mid-term traders. As a result I would expect to indexes moving around those levels again. It is not necessary has to be that way (keep in mind that this is my personal opinion based on my personal technical analysis). Yet, I would closely watch the indexes over the next couple of sessions, especially after today's high volume – if you look at MVO (MarketVolume Oscillator measures amplitude of a volume surge) you will see how big it is.

A few days ago I have drugged your attention to the high negative MVO reading on July 8, 2009, now I attracting you to high positive MVO readings … (you may see MVO on MarketVolume.com charts).

S&P 500 Chart

Last week I was bearish (see my previous week "S&P 500 and DJI post")– not as much this week. This week we saw nice volume surge during the price decline - see red MVO (Market Volume Oscillators shows how big volume surge is in relation to the recent average volume). I mentioned last week in the same post that it would be nice to see a volume surge which could mark the panic selling during the decline and possibility of reversal. Now the question is if this volume surge is big enough to reverse the market from the correction.

The volume surge on July 8, 2009 was quite big, yet not as big as the one on May 20, 2009, May 6, 2009 or April 20, 2009. However, since the middle of the May 2009 the average volume is down and in relation to this volume the volume surge on July 8 could be considered big. I would say that because of this volume, we may see up-move for a couple of trading session. If it happens I would recommend monitoring charts more closely. The other technical indicators (beside volume and MVO) on the hourly charts are mostly bullish as well and I would say that my technical analysis shows good odds for the S&P 500 index running over 900 and the DJI index going above 8,400.

However, the correction we have now is quite big and prolonged (I have alerted about it almost two months ago) and it is difficult to believe (still possible) that this single volume surge may mark the end of this down move. That is why I would recommend monitoring charts over the next couple of sessions. If the recent volume surge is ignored and the indexes go down again then I would consider the stock market in serious trouble. If at this moment hourly charts (1 bar = 1 hour) are more or less bullish then I would not say the same about longer-term charts. I you take a look at 3-year chart (1 bar = 3 days) you may see what I mean – the next check point for the S&P 500 and DJI indexes could be April 21, 2009 lows (I do not mentions the Nasdaq 100 because it nos heavy loaded by financial and automotive companies that trouble the market).

Chart 1: S&P 500 hourly chart with elements of technical analysis

S&P 500 and DJI

The stock market is down this week. As I expected in my previous week "S&P 500 Technical Analysis" post the indexes were Bearish. The S&P 500 and Dow Jones Industrials have moved close to their June 23 - 24, 2009 lows. The Nasdaq 100 index was less negative and still stays close to its highs.

If the June 23-24 lows (which I would not named as very critical and difficult level) are broken, then the next, much more sensitive support level is on the line of May 13 and May 21, 2009 lows. I call this level sensitive to many investors because if you draw the horizontal line touching those support points you will see that starting from May 4, 2009 the DJI and the S&P 500 indexes were traded above this line. That means that all mid-term and long-term traders who opened long position (bought stocks) in this period of time (from May 4 until now) are going to be in the losing or zero profit position. We may assume that over the last two months (from May 4 until now) there could be quite a big number of long- and mid-term traders who went long. As well, we may assume that the odds are good that some of them set stop-loss levels around May 13 and May 21, 2009 support line. Since the volume is down and we have not seen high volume surges during the index decline, I may assume that majority of them are still have position opened and their stop losses are not hit yet. At the same time a low daily trading volume may witness that investors calmed down after the strong rally in March-April 2009 and some of them could wait for better bargain price to enter the market. As I mentioned in my previous post it would be nice to see some volume surge during the price drop which could mark the end of the correction, however, so far we have not seen it. This volume surge would mean that the price drop to the level that become attractive to many investors to start buying from sellers that are pushing the market down since the middle of June.

As you may see my longer-term technical analysis is still a little bit bearish. Some of my assumption could be strange to someone. However, this is how I look at the stock market. One of the aspects of my longer-term technical analysis is to find out from the supply/demand point of view what long-term and mid-term traders are doing. I am not talking about simple traders like me, but about those who has big bags of money and whose steps are represented on the chart by volume spikes. That is why I consider volume based technical analysis very important – it shows actions of big players.

I am sorry I do not post a chart this week. I will try to id in my next post. From the short-term technical analysis point of view the indexes are still negative at this moment. We still may see slide down. However, I would closely watch charts during the trading day since the short-term sentiment can change sharply.

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