Technical Analysis

Coming back to the technical analysis I may say that do far we have not seen a market reaction on the oversold indication seen on January 21-22, 2010.

The good news is that the S&P 500, DJI and many other indexes did not dropped strongly since then, by indicating a possibility that these indexes hit the bottom of the correction. If you check the S&P 500 financial sector index you will see that this index is at its low (support) level which was already tested in the middle of August 2009, beginning of September 2009, beginning of November 2009 and December 2009. For many indexes (like in case with S&P Financial Index) the current level is very strong support level and the fact that these indexes had difficulties in following the Nasdaq 100 last week decline is a good sign.

The bad news is that the Nasdaq 100 indeed declined. I have seen many times when the down move or up move was started by one index and then it was picked up by the rest of the market. The fact that the Nasdaq 100 declined strongly and indexes ignored the oversold signals on January 21-22, 2010 tells that we still could wait for another wave of panic selling.

From this point of view I would say that the odds of the end of the current correction are 50/50 and I would say that a lot depends if the rest indexes will get into selloff scared by this week's selloff in the Nasdaq 100 sector.

So far the technical analysis of the charts suggests possibility of the further decline. However, there are many signals that suggest oversold condition and possible support. Some of them are:

1. Low negative MVO on all indexes which would indicate big bearish volume surges and strong panic selling in all market sectors - this usually leads to the shift in the supply/demand balance and reversal. It worth mentioning that the daily volume in the Nasdaq 100 sector on January 29, 2010 is the strongest daily volume in this sector since April 20, 2009.

2. Low Advance/Decline readings on major indexes would suggest the oversold condition and possibility of the reversal as well.

3. High volatility. If you check the ATR(9) on the Nasdaq 100 1-year chart you will see that the volatility on this index is at its March 2009 level (bottom of the stock market crash). On the S&P 500 and DJI indexes volatility have climbed to the beginning of November 2009 level (support of the October's correction).

I would say that the oversold signals are very strong and we may see strong bounce up. However it does not mean that we will have it tomorrow. What I want to say is that the stock market is predisposed for a recovery move up, however it still could slide lower. I may say only that because of the high volatility I would expect to see sudden and strong reversal and it could be tomorrow or it could be in a week. In this case I would only recommend monitoring shorter-term charts as well as some lagging indicators that would confirm a reversal.

Nasdaq 100

Last week in my "Advance/Decline" post on January 24, 2010 I have expressed my thoughts that taking into account volume and advance/decline indications on main indexes (S&P 500, DJI, Nasdaq 100) we could be closed to the bottom of the current correction. However, the past week was negative.

The Nasdaq 100 index was the main player who pushed the market down. The Financial Sector (see S&P Financials), Housing Sector (see PHLX Housing Index) and some other market sectors were flat. The S&P 500, DOW indexes (DJU, DJI, DJT) where flat the first half of the week yet slides by the end of the week under the pressure of the hi-tech companies from the Nasdaq 100 index.

You can hear in the media that the market is upset by the political balance, that Wall Street was worried about Bernanke re-election, that banks were upset by the proposal of the additional taxes, etc. I just do not buy it - those news are not the news that moves market.

Take a look at the Nasdaq 100, DJI and S&P 500 5-year chart. The Nasdaq 100 index during the 2008 stock market crash had smallest loss, there were no big volume surges during the stock market crash and the Nasdaq 100 had strongest recovery after the crash. What does it tell? It simply tells that the main panic was in the financial and transportation sectors. That is why S&P 500 and DJI crashed stronger. The big investors were desperately pulling money out from these two sectors - that is why we may see huge volume during the crash on the S&P 500 and DJI indexes. Big investors were not pulling funds out of the Nasdaq 100 companies - there were no huge volume surge in this sector during the stock market crash. In opposite the big investors were relocating funds from the transportation and financial sectors into hi-tech companies. That is why the Nasdaq 100, Nasdaq Biotechnology, Nasdaq Computer and Nasdaq Internet indexes completely recovered by the end of December 2009 from the 2008 stock market crash.

Now when the Hi-tech sector was at the top, the some of big investors started to take profit out. Does it mean we will see another strong down-trend? Not necessary, for this we need to have strong panic news like bubble in housing sector (2008), internet bubble (2000), etc. Yet, I think the period of the recovery rally on the Wall Street from the stock-market crash could be over and now we could see something like we saw in 2004-2006 - quiet up and down trading with positive or negative bios until somebody make a new bubble.

Advance/Decline

It was clearly bearish week. In my previous week "S&P 500 Chart" post on January 18, 2010 I  have stated my points, why do I believed in to coming correction. The main my point was an increase in volatility. By following my words, we had strong advance on Monday, which only moved volatility level higher, and as a result the strong decline for the rest of the week. On Thursday January 21, 2009 in my "Volume, Volatility and Advance/Decline" again, I have confirm that this does not looks like the end, mainly because advance decline reading did not hit critically low levels by indicating panic selling. As a result, as I mentioned the previous post "the next move down could be even stronger than we had over the last two days" Friday, the last day of the week, brought us even stronger decline.

One more time you may see an importance of monitoring several technical indicators at the same time. In my understanding professional technical analysis combines analysis for the price, volume, volatility and advance/decline data. One may say that he/she can use a price indicator with success. However, without volume, advance/decline and volatility technical analysis I do not believe it is possible to define the current trend stage, to see where the stock market is moving, predict possible strong changes in a trend and be on the alert when market, index or stock may crash. Only combined analysis of volume, advance decline and volatility data may give you one step ahead vision. Those who disregard these data, I believe, sooner or later, will be caught by the week similar to the one we just had.

The same is with indexes. Even if you do not trade indexes (ETFs and other index tracking securities), you have to monitor and analyze them. If your stock was generating buy signals this week and you did not understand why it did not move up, then by taking a look at indexes you would understood that the general bearish sentiment took over the stock market and your stock was drugged by the general stream of the market.

Coming back to the technical analysis, I would like to say that on Friday January 22, 2010, the S&P 500advance/decline readings did dropped to the extremely low level by indicating strong panic selling. We have not seen such low advance/decline reading in the S&P 500 sector since November 27, 2009. The indexes and market may go further down, however, the history analysis (that is done since 1997) shows that at this point we may see a strong bounce and resumption of the up-trend – unless there is a stock market crash (I do not think that this is the case).

Another point is very strong daily volume over the last two days of the week. On those days, the daily volume in the Nasdaq 100 and S&P 500 sectors were the strongest one since December 18, 2009, and on DJI it was the strongest daily volume since December 4, 2009. If we see e decline in volume activity, the principles of volume based technical analysis would suggest that the panic is over and we may see a reversal.

Taking into account volume and advance/decline indication I would not risk by holding the short position right now. The only what I would accept is a trailing stop which would protect earned profit and would give a chance to make more. Yes, we still may see slide down or we may see modest advance and then decline to the new lows. However, I think we are close to the bottom of the recent decline.

I am not stating that we are at the longer-term bottom and over the next few months we will have bullish market as we had after November 27, 2009. We can have it, but it is not necessary has to be the case. We can have just bounce to the most recent high (January, 2010 highs) and then we can have slide again. I do not know what is going to happen in a month. Even if I look on longer-term charts, my view is always adjusted by new coming data and could be completely changed. Right now my technical analysis tells me that we could be close to the bounce up. If this happens, then we will take a look at the next step which, in my case, would be based on the combined technical analysis of price, volume, advance/decline and volatility data again.

Volume, Volatility and Advance Decline

I usually do not make posts during the week. However, I could be nice to say a few words. I think may traders are wondering if they should panic. I would like to drag your attention to several factors:

1. Today's daily volume very high and may push tomorrow indexes up. If this does not happened tomorrow and we will have flat trading or just shallow advance then I think we may see further slide.

2. Volatility is going up - this is a bearish sign. If we see tomorrow strong up move as reaction on today's bearish volume it only will add to the volatility and the next move down could be even stronger than we had over the last two days.

3. Even we saw today big selling volume, the advance decline data on the S&P 500 were not extremely Bearish (extremely low), which would mean it is not a panic selling yet and there is still a room to go down.

S&P 500 Chart

Last week in my "Mixed Market" post on January 10, 2010, despite prior up-move in period from January 4, I was a little bit sceptical about further up-move (see four points I mentioned in that post). Now, one week later we have indexes lower after volatile week. Coming back to those four points:

1. High volume during the up-move in period from January 2 until January 8, 2010 - this point is still actual and this bullish volume still would suggest overbought market with possibility of a decline;
2. Second point was low volatility with possibility indication of coming action "squeeze before strong events" - actually we had some strong movements up and down during this week, and actually volatility started to climb up which is a bearish sign.
3. Third point was that I did not like sharp up-move at the end of trading on Friday January 8, 2010 since it did not fit overbought condition. However, already on Monday January 11, 2010 strong opening and then strong decline down changed my view. I already mentioned several times before about sharp opening and then strong decline at resistance levels as a good Bearish signal.
4. Forth point was huge volume in C stock (Citigroup) - this volume still bothers me, since I still do not see a reversal reaction on it.

Now, coming back to the technical indicators and technical analysis I may say that majority of indicators on NASDAQ 100, S&P 500 and DJI (indexes that I track) charts are bearish. However, these indexes already were bearish a few days ago on January 12, 2010 and then we had a strong recovery on January 13, 2010. Now the indexes down again and technical analysis generates bearish signals again. There is only small one difference between current bearish indications and bearish signals on January 12 - volatility now is higher. This would increase the odds of possibility of further decline.

I have posted the S&P 500 index chart with indicators I use in my technical analysis. I have not done it for a month assuming that those who follow my blog already knows what tools I use and they have access to the same charts in real time. I usually look at hourly charts (1 bar = 1 hour) and hourly charts are not the charts that help to predict a mid- and long-term trend. These charts are intraday charts and they should be monitored during the trading hours.

Chart #1: The S&P 500 chart with some elements of technical analysis

Mixed Market

Past week was market by a side-way trading on the DJI and Nasdaq 100 indexes - these indexes are basically on the same level where they were on Monday. The S&P 500 in opposite to the rest of the market moved slowly up.

There are several things that I would like to mention. First one is that during the past week, the S&P 500 index up-move was supported on high volume. The S&P 500 index daily volume on January 7, 2010 is one of the highest volumes since November 2, 2009 (the only higher daily volume was noted on December 4, 17 and 18, 2009). The same with Dow Jones Industrials (DJI): the only higher daily volume than the daily volume on January 7, 2010 was noted in DJI sector on November 17 and 18, 2009 (since November 2, 2009). This would signal that there is a possibility that the current side-way with positive bios trading could be close to the end. As a rule high volume during the price advance could lead to the shift in the supply/demand balance when the number of Bullish traders became exhausted.

Second thing that I would like to mention is the low level of volatility. As a rule, if the market would be going for a correction we should be seen increase in the volatility. In opposite we see big decrease in volatility. Actually, the volatility level on DJI and S&P 500 index has dropped to the lowest since October 17, 2007 level. Traditionally, the low volatility suggests stability on the market and dominance of Bullish sentiment. Yet, some analysts characterize strong drop in volatility as a squeeze before some strong events - like a "silence before storm". The good thing is that if the market meant to go into correction, most likely it will not be a stock market crash and majority of traders should be able to spot it.

Third thing that I would like to mention is the strong recovery before the market close on Friday, January 8, 2010. This is not a typical recovery for overbought market...

Last thing worth mentioning, from my point of view, is the high volume surge in Citigroup stock on December 15-19, 2009. This volume was even higher than the volume in C stock during the stock market crash. I usually do not look for stocks, however we all know that the Government has (or had) part of the shares of Citigroup. Was it Government dumping bailouted shares... If yes then what does the Government know that we do not know? If it not the Government then who was dumping such huge amount of Citigroup shares in panic???

Nasdaq 100

The last week of 2009 (see my previous "Light Volume Trading" on December 27, 2009), as I expected, was relatively flat and quiet.

Taking a look over the last month we may see that the DJI has been trading mostly side-way in the narrow 2.5% corridor (see my "DJI" post) since the middle of November 2009. The DJI has been trading above the upper line of this corridor just for a couple of trading sessions, yet on December 31, 2009 this index dropped back into its corridor range.

The S&P 500 index has pattern similar to the DJI trend. It advanced about 100 points (about 1%) above the upper line of its November-December side-way trading range and on December 31, 2009 it dropped back.

The NASDAQ 100 index was an exception from the DJI andS&P 500 indexes rule. In opposite to the rest of the indexes and the rest of the stock market, starting from the middle of December 2009, the NASDAQ 100 index advanced strongly.

Personally, I did not like this move on this index. It is a strange to see a rally on the single index while the rest of the stock market is hesitating in starting a correction down. The current behavior of the NASDAQ 100, DJI and S&P 500 indexes remind me the minimized variant events in 2007. If you open 5-year index chart you will see that the DJI and S&P 500 indexes stopped their up-move in May 2007 and these indexes where mainly traded side-way until the beginning of November 2007. The NASDAQ 100 index (in opposite to the rest of the stock market) continued to move up strongly until the beginning of the November 2007 as well. And then, in November 2007 strong correction started which then turned into strong down-trend which then turned into dramatic stock market crash.

Such stock market behavior could be explained in the way that after strong long-term up-trend (in period from June 2006 until May 2007) the stock market became heavily overbought and was ready for a correction down. The stock market was ready for a correction down in May 2007, yet the NASDAQ market sector still had a potential to move higher and still was collecting greedy buyers and delaying the rest of the stock market from a correction. Then in November 2007 when the NASDAQ sector has become heavily overbought as well and was not able to hold the rest of the market from the correction we had a beginning of a strong decline. It is another story that during this decline (in August-November 2008) the market discovered housing bubble in the financial sector and discovered that automotive industry oversupplied the market, which all lead to turning the strong decline into the strong stock market crash.

Right now we have some similar mini-version of the same events. Since July 2009 we have not seen any strong correction. Mostly positive trading pushed US indexes strongly up. There is a possibility that the indexes and corresponding stock market sectors has become overbought and are ready for a correction down, which would be very healthy. Yet, theNASDAQ 100 index continued to collect the buyers while the rest of the market was trading side-way. If the indexes are overbought and just waiting for the NASDAQ to reach its overbought top, then when it happens, I think we may face a stronger that usual correction down.

I am not stating that we may face another stock market crash. Stock market crash does not start suddenly in one day. A rule it starts from the strong correction down and if during this correction very bad news are revealed, than there is a possibility that the "very very very bad news" may turn a correction into crash.

Overall, despite the positive sentiment on the market, I am a little bit skeptical about further up move. Taking look at longer-term index charts you may find that many technical indicators signal strongly overbought levels. We have not seen any strong correction since the begging of the recovery after the crash (since March 2009). On longer term charts, the only noticeable correcting occurred in June 2009 (about 10% on majority of indexes). The NASDAQ 100 completely recovered from the crash by running above its September 2008 level. So, I think that the market should be at least a little bit overbought and it would be healthy to have a correctional move down... unless we are at the door of another bubble...

Light Volume Trading

I have mentioned several times over the last time about side-way trading and more conservative approach would assume waiting when upper or lower line of this corridor is broken. So, we have upper line of the 2.5% corridor broken (see my previous "DJI" post on December 20, 2009). However, not many indexes have run over this level and I would not run into conclusion that now only Bullish market is in front of us. We may see that the Nasdaq 100 index run strongly up. We may see that theS&P 500 index advanced above upper line. On the other hand the DJI index, NYSE Composite index and some other indexes are still in their side-way corridor. This is not a very nice picture when some of the indexes are rallying up while other indexes are stuck in side-way action and I think it tells that the current move up is not something that is supported by a whole market.

When a rally on some indexes is not supported by up-move in whole economy there are good odds that this move may halt soon. It usually happens when the market is ready for a correction, yet, it does not moves down because group of positive market sectors (positive indexes) holds other indexes on the same level (in the side-way corridor). If this is the only thing that hold the market from the correction down, then this rally on the Nasdaq 100 could become exhausted very soon and then what?

From the prospective of technical indicators, at this moment, the sentiment is positive and suggests possibility of further up-move. However, this is a holiday season, we have light volume and historically this period of year is marked by slow and positive trend. I would not expect to see any strong movement next week, yet, in January 2010, I think, we could be surprised...

DJI

The purpose of technical analysis is to predict a possible future trend movement and, as a rule, predictions are based on the comparing the history and applying the history research results to the current market. This week I would like to show a few charts of Dow Jones Industrial (DJI) index. I selected 10-year and 6-month chart to demonstrate where the main indexes are at the current moment in relation to the longer-term periods.

From the 6-month DJI chart (see the first chart) you may see that the DOW index has been trading in narrow (2.5% wide) corridor for a month. I believe this side-way action has made many traders impatient to see when this pattern is broken and many of them, I think, expect to see strong correction, which would be logical after such strong recovery. However, I would not rush into short trade without setting a tight stop-loss strategy.

If you take a look on the second chart below (DJI 10-year chart), you will see that the DJI index is traded at the level which is inside of the historically defined long-term corridor. In 1999-2001 the DOW index spent 18 months in 8% corridor (between $10,000 and $10,800) and in 2004 we had 12 month of side-way trading in the same corridor.

Can we assume that we may expect to see the Dow index traded in the same 8% corridor for prolonged period of time now as well? What could be a reason that the Dow Jones index was in that 8% corridor for such long period of time? Maybe this is the level where the real value of the companies listed in the DJI index is: the Dow listed companies are not under-evaluated and they are not over-evaluated. If this is true then it would explain side-way trading before and we can expect side-way trading in the same corridor for longer period of time again.

Now, coming back to the 6-month DJI chart, we may see that the DJI index still did not hit the top of this 8% corridor. Because of that, the exit from the current 2.5% side-way trading still could be up toward the $10,800 level. This is why even when I see technical analysis results suggesting down move I would not play short without tight stop-loss.

Chart #1: The DJI Chart 6-month view of the current 2.5% side-way corridor
Chart #2: The DJI Chart 10-year view of the historically defined 8% side-way corridor

S&P 500 Chart

It is a month as the market has been trading side-way (see the S&P 500 index chart below). I have already been pointing on sideway trading in my previous posts (starting from November 15, 2009: see my "Technical Analysis" post), and it looks like the market continues to follow this pattern. Last week in my "Sideway Trading" post on December 5, 2009 I expressed my expectation to see some action on exiting from side-way trading, yet, it looks like we had another bounce from the lower line of the side-way corridor and now the indexes (S&P 500, DJI and Nasdaq 100) are headed to the upper-line of this corridor (resistance line).

At the current moment, the majority of the technical studies on my chart are bullish. However, we are coming closer to the upper corridor line and up-move become weaker and we may face another bounce down.

Now, after 1-month of sideway trading I would not bet on up-trend until I see the indexes, at least S&P 500 and DJI, are breaking strongly the resistance line (not breaking it for 15 min period and a for a few points only). At the same time I would not bet on the down-trend until I see the same indexes moving below the lower line (support line) of the sideway-corridor. The indexes have been trading in this corridor long enough to assume a possibility that overbought sentiment accumulated in the first half of November is not in force anymore and most likely it will not push the market down. Now, on my opinion, the longer-term sentiment is the only force that may push the stock market down. We may see that since July 10, 2009 the main indexes (S&P 500, Nasdaq 100 and DJI) were in the strong up-move and we may assume that they could accumulate overbought sentiment and without a new fuel (new investors coming into the market) we could face a strong correction (at least the same as we had in second half of June 2009).

Still, since we do not know what exactly may happen, we may wait for clearer and stronger signals. At least this is my view and my position on the current market.

Chart #1: The S&P 500 Chart with elements of technical analysis:

Free Quotes

This is just a quick post. I saw some free data that could be interesting to somebody and I would like to share the info.

I'll try to post my regular report today afternoon. Meanwhile, If you are interesting in some free data you may find free index quotes at the quote section of MV(http://www.marketvolume.com/quotes/). As a rule they do not show volume and advance decline quotes to the general web surfers and require "free trial" registration at least to see these quotes and data. However a few day ago they have opened access to the general public and you may monitor index volume and advance/decline data for free without any registration.

Below you may see snapshoot of some quotes pages.

At http://www.marketvolume.com/quotes/index.asp?s=SPX you will find free index quotes including volume and advance decline quotes

S&P 500 Index (^SPX)
Last Trade	1106.58		Advanced Volume	1,900,459 K
Trade Time (ET)	12/11/2009 16:00		Declined Volume	699,061 K
Change	4.41(0.40%)		Unchanged Volume	32,205 K
Previous Close	1102.17		Total Issues	500
Open	1103.96		Advanced Issues	315
High	1108.5		Decline Issues	121
Low	1101.33		Unchanged Issues	64
Volume	2,921,573 K		New Highs	46
Up Volume	1,647,332 K		New Lows	0
Down Volume	1,236,660 K		TRIN	0.96

Athttp://www.marketvolume.com/quotes/technical_analysis_price.asp?s=SPX y you my see price free based technical quotes.

S&P 500 Index (^SPX) Exponential Moving Averages Analysis

Indicator	Last	Change	Sentiment*
5-day Exponential Moving Average	1,101.95	2.28 (0.21%)	Bullish
10-day Exponential Moving Average	1,101.21	1.17 (0.11%)	Bullish
20-day Exponential Moving Average	1,097.76	0.92 (0.08%)	Bullish
50-day Exponential Moving Average	1,080.81	1.05 (0.10%)	Bullish
130-day Exponential Moving Average	1,031.35	1.17 (0.11%)	Bullish
260-day Exponential Moving Average	1,020.10	0.67 (0.07%)	Bullish

S&P 500 Index (^SPX) MACD(12,26) Analysis

Indicator	Last	Change	Sentiment*
EMA(12): Fast Exponential MA	1,100.76	1.04 (0.09%)	MACD sentiment is Bearish , although MACD Histogram moves up, it may indicate the possibility of coming changes in MACD sentiment
EMA(26): Slow Exponential MA	1,094.87	0.93 (0.09%)
MACD (12,26)	5.90	0.11 (1.94%)
MACD Signals: EMA(9) applied to MACD	7.70	-0.37 (-4.53%)
MACD Histogram	-1.81	0.48 (-20.91%)

S&P 500 Index (^SPX) Stochastics Analysis

Indicator	Raw Stochastics	Stochastics %K	Stochastics %D	Sentiment*
9-day Stochastics	62.00	48.31	40.31	Bullish
14-day Stochastics	64.31	50.11	41.26	Bullish
20-day Stochastics	64.31	50.11	42.48	Bullish

S&P 500 Index (^SPX) RSI (Relative Strength Index) Analysis

Indicator	Average Gain	Average Loss	Relative Strength (RS)	Relative Strength Index (RSI)	Sentiment*
9-day Strength	3.78	2.57	1.47	59.58	Bullish
14-day Strength	4.12	3.04	1.36	57.59	Bullish
20-day Strength	4.04	3.07	1.32	56.82	Strongly Bearish

Athttp://www.marketvolume.com/quotes/technical_analysis_volume.asp?s=SPX y you may see free volume based technical quotes.

S&P 500 Index (^SPX) VO, PVO and MVO (Volume Oscillators) Analysis

Indicator	VO*	PVO*	MVO*	Sentiment**
9-day Volume Oscillator	0.89	-11.46	0.00	No abnormal volume activity
14-day Volume Oscillator	0.91	-8.85	0.00	No abnormal volume activity
20-day Volume Oscillator	0.90	-10.11	0.00	No abnormal volume activity

S&P 500 Index (^SPX) MFI (Money Flow Index) Analysis

Indicator	Positive Money	Negative Money	Money Ratio (MR)	Money Flow Index Index (MFI)	Sentiment*
9-day Strength	19,464,228 M	16,174,684 M	1.20	54.62	Bullish
14-day Strength	25,424,639 M	24,840,144 M	1.02	50.58	Bullish
20-day Strength	39,849,790 M	32,077,759 M	1.24	55.40	Bullish

Athttp://www.marketvolume.com/quotes/technical_analysis_advancedecline.asp?s=SPX you may see free advance decline technical quotes

S&P 500 Index (^SPX) Advance/Decline Sentiment Analysis

Indicator	Last	Sentiment*
Advance/Decline Issues Ratio	2.60	Positive
Advance/Decline Issues Percentage Oscillator	44.50 %
Advance/Decline Volume Ratio	2.72
Advance/Decline Volume Percentage Oscillator	46.22 %
Advance/Decline Sentiment	72.68 %

S&P 500 Index (^SPX) TRIN Analysis

Indicator	Last	Sentiment*
TRIN	0.96	Trading activity in advancing stocks is approximately the same as in declining stocks
Average Volume per Advancing Stock	6,033 K
Average Volume per Declining Stock	5,777 K

There are more to quotes to chose from....

Sideway Trading

The indexes have been trading side-way since November 16, 2009. If you take a look at the Nasdaq 100, S&P 500 or Dow Jones Industrial charts you will see that since November 16, 2009 the main swing happened at the market open and majority of the time the indexes were traded side-way and basically they are at the same level were they three weeks ago.

The sentiment on the stock market becomes more intense. Second time since November 16, 2009 we may see increase in volatility which is not a very positive sing. The last trading session on Friday December 4, 2009 was quite contradictive - very volatile and on high volume - on lower time-frame index charts we may see bullish signals and on higher time-frames charts we may see bearish signals.

I would not say that the technical analysis is bearish at this moment. Majority of technical indicator are bearish at and taking into account an increase in volatility the one could say that the odds of the developing a strong correction are quite high. On the other hand, over the last weeks we saw very sudden changes in the sentiment when at the market close the indicators were bullish and on the next trading day at the opening the market was deeply down or indicators were bearish at the market close and on the next trading day at the open the market was strongly up.

Overall, I would say (strictly my opinion) that the bullish indications on intraday index charts are not letting me to trade short. At the same time bearish signals on higher time-frames make me scary to be in a long trade. In general, I would expect to see strong correction down, yet, intraday Friday’s strong bullish signals are somehow unexpected and do not fit in the general picture of the sentiment. Furthermore, I would stay in cash for a while. I think the coming week could be very interesting and define the trend. I consider that it is better to make less profit than go into a gambling.

Trading on Dubai World Worries

Last week, in my "S&P 500 Advance/Decline" post (on November 21, 2009), I mentioned about very low Advance/Decline quotes readings on the S&P 500 which signaled oversold stock market sentiment. I have pointed to the higher odds of the up move at that time. The indexes (S&P 500, Nasdaq 100 and DJI) indeed reacted on that oversold signals by the strong up-move on November 23, 2009. However, this gain was shadowed by the "Dubai World financial worries" that hit the market and pushed it strongly down on November 27, 2009.

I would say that on my opinion, there are two good and two bad things about this sharp drop down. The Friday's decline at the market open is one of the strongest declines within a single session since the end of recession (March 2009). This is the first bad thing - it shows us that the stock market is on the stage when it could become unstable very easily and that the sentiment among investors is not as bullish as it was 6 months ago. Actually, it confirms my conclusion expressed in the "Long-Term Technical Analysis" post on November 17, 2009 that the stock market is not the same as it was 6 month ago.

Strong decline on November 19, then strong advance on November 23 and then strong decline on November 27, 2009 - all of that suggest an increase in the volatility and that is not very good (second bad thing). If you take a look at volatility indicators (VIX index, ATR, Standard Deviation, etc) you will see that the volatility is still at low level which is good. Yet, should volatility continue to increase we could face a possibility of a correction down.

The first good thing is that the indexes have been very little time at their lowest level on Friday 27, 2009. The Nasdaq 100 index started to move up on the second minute of trading, the S&P 500 index reversed up after only 2 minutes of decline and DJI index has started to recover in ten minutes after the market opened. It looks like (it is an assumption only) on Thursday November 26, 2008 (when the "Dubai worries" started to spread out) a lot of bullish traders (investors) who were in long position have placed stop-loss orders, those of bullish traders who were in cash have canceled their buy orders and bearish traders placed sell orders. After the market open on Friday, it took about 10 minutes to satisfy demands of all traders who were in panic (who placed stop-loss order and who placed sell short order) and execute their orders. Then, those bullish traders who were in cash and decided to cancel "Buy Long" orders on Thursday, on Friday's morning were attracted by low barging price and started to buy by overbuying "bearish traders in panic" and by pushing stock market up. If the first bad thing is that we have big group of investors whose sentiment is unstable and who could push market down, the first good thing is that we still have a lot of traders (investors) who is looking for a good bargain price to buy.

The second good thing is that during the recovery on Friday we had very strong volume, especially taking into account short trading session. I would say it could tell us that the number of investors trying to buy at low is quite big.

Overall, the stock market is in sideway trading since November 11, 2009 - it is very clearly could be seen on the S&P 500 chart. The upper sideway trading line is going through the highs on November 16, 23 and 25 and the lower sideway line goes through lows on November 13, 19, 20 and 27. By not going deeply into technical analysis a conservative trader may say: let's wait when one of this line is broken and stock market trend is defined more clearly.

In general I'm still slightly bullish by the following 3 reasons:
 - over the last 2 week we had 3 times very low oversold advance decline readings;
 - volatility is still low, yet it very close to the the dangerous level;
 - on Friday the indexes have break lower line of sideway trading, yet they climbed back above it very fast and did not continued to decline.

Despite the fact that I'm slightly bullish the danger of a strong move down is quite big...

S&P 500 Advance/Decline

Last week in my "Technical Analysis" post on November 15, 2009 I have expressed a possibility of a correction down. Yet, at the same time, I have mentioned that I would not wait for a strong move down, but rather for a short-term decline. Now, after 3-day decline on November 18-20, 2009 we may say that we had a shallow decline: the Dow Jones Industrial is 1.1% down from its high, the S&P 500 is 1.7% down and the Nasdaq 100 dropped for 2.6%.

I think that this is a time to check the index charts again to see if the current decline may grow into a bigger and stronger correction. Last week I brought to attention two points that would suggest only a short-term correction: a) absence of bullish volume surges during the November 2-13, 2009 up-move; b) low volatility. Taking look at the same indicators one week later, I may say that we still have not seen any high volume during the price advance (MVO remains at zero), and in addition, even the last three day of negative trading did not bring any increase into volatility (ATR and VIX index remain at the same levels they were a week ago). So, these two factors would still suggest that the current correction should be a short-lived only.

Now, taking a look at other indicators I may say that technical analysis is mostly bearish: SBV is flat and negative, Advance/Decline Oscillator and McClellan Oscillator are at low negative levels, Stochastics is below 20. All of that would suggest higher odds of further decline. There are still a few positive signals: RSI just crossed 30 line on its way up and MACD is close to move from negative into positive area. The other positive sign is high volume during the price decline on November 20, 2009 (see red MVO), yet it is difficult to say that this was a strong bearish volume. Overall, technical analysis is bearish at this moment.

Despite the fact that technical analysis is bearish I would still stay on the same note I was a week ago - current decline may not be a strong. Furthermore, I would not bet on short trading. One more factor that gives me more confidence in not believing in strong decline is very low advance/decline quotes on the S&P 500 on November 19, 2009. I have already mentioned in my "Advance/Decline" post on November 1, 2009 the importance of the S&P 500 advance/decline issues and volume quotes monitoring. The low advance/decline readings in the S&P 500 index suggests strongly oversold condition that usually could be seen before a reversal up (unless it is a recession or stock market crash). We had low advance/decline quotes on October 28 and 30, 2009 and strong up-move after that. At that time, on November 1, 2009 I pointed to good odds of the up move. The same is now, because of the very low Advance/Decline quotes reading in the S&P 500 sector on November 19, 2009 I would consider that the odds are good that up-move may be resumed in near future.

I am sorry I have not brought chart snapshoot this time. You may see the chart setting I usually use and indicators I mentioned above in my "S&P 500 Chart" post. I would highly recommend checking charts and quotes by yourself before relaying on anything I say.

Long-Term Technical Analysis

As was promised in my previous "Simple Trading Strategy" post, I am bringing to your attention some points from my personal longer-term technical analysis.

Various techniques are used to analyze the stock market long-term trend. Some analysts focus on 5-year to 10-year charts, others focus on economic factors, etc. I would like to draw your attention to the interesting on my opinion fact that could be seen on daily charts (1 bar = 1 hour).

In the S&P 500 chart below (the Nasdaq 100 and DJI charts are very similar to the S&P 500 chart), you can see that the stock market has been in a recovery movement since the first half of March, 2009. This is when the "2008 Stock Market Crash" ended. Since then, the stock market has been in a steady upward movement, interrupted by shallow corrections from time to time. If you take a look at these corrections, you will see that the further from the bottom indexes (S&P 500, Nasdaq 100, DJI and other indexes) are, the smaller are the overbought signals that are required to push the stock market into a downward correction. You can see that this divergence between price's new highs and technical indicators (price makes new highs, but smaller, overbought indicators signal a correction) on the S&P 500 chart below on SBV, Stochastics and RSI. I think that you may find the same tendency with other technical indicators as well.

The S&P 500 Chart with elements of longer-term technical analysis

Such divergence between price and technical indicators is nothing new in technical analysis. You can see something similar more often in smaller timeframes. It usually can be seen before a stronger change in a market trend. That means that the stock market is not the same as it was six months ago when a majority of shorter-term, overbought signals were ignored, while indexes continued their rally. I am not saying that the market will crash tomorrow - not at all. The indexes and the market may continue to move up. What I want to say is that the market may become predisposed to a change in its behavior.

If this divergence between new price highs and technical indicators continues to develop in the same direction, there could be several possible scenarios: we may face a stronger downward correction than we saw and then the recovery may continue; we may go into a sideways market like we were in during 2004 after a strong recovery in 2003 that followed the 2000-2003 stock market crash; we may fall into a slow depression like there was after 1929 crash; or there could be something new.

There is still another possible development. In the same S&P 500 chart above, you can see that we had two waves of divergence between price and indicators where the second wave was smaller (less Bullish) than the first one. There is a possibility that a third wave of divergence might develop that could be smaller than the second one.

Another factor that could support the above-mentioned possibility of changes in stock market sentiment is timing. It soon will be a year since the recovery began. That means that the period of "expectation beating reports" could be over very soon. During the crash in 2008, many public companies reported losses and, by the end of 2008, everyone had lowered their expectations. Furthermore, in 2009 everyone has had "expectation beating" reports that have attracted investors and money into the market and which feed the recovery. How many companies do you think will report an "expectation beating" increase in profit in 2010 in comparison to 2009? If not many, other economic factors (unemployment, sales, GDP, borrowed money from China, etc) may begin to play roles in the market's direction.

I don't want to dig deeply into a fundamental analysis of the economy and economic factors that move the long-term market. I just want to say that I see some predisposition to changes in long-term market sentiment and market behavior. Since I am not a long-term trader, I am not going to attempt to predict where the market will be in six months. What I'm trying to define right now is where the market may continue its move. Will it move up by going into a third wave of divergence or will it begin to change its trend direction? I think it could become clear by simply monitoring higher-timeframe index charts within the next couple of weeks.

What affects me is how the market reacts to the overbought and oversold signals and how I should adjust my trading strategy in order to avoid encountering an unpleasant situation. If I see that the market starts to react differently to trading signals generated by my technical analysis (my trading system), I usually take a look at longer-term index charts to see the general market stage. Right now, I am looking a little ahead. The indexes (S&P 500, Nasdaq 100, DJI and other) still move up more easily then dropping down and we still may see new highs and further upward movement. Yet, from a prospective of my technical analysis, I see that we are in a period in which the stock market could become predisposed to changes in the long-term trend.

Simple Trading Strategy

A few weeks ago I promised to take a look at the longer-term charts and longer-term technical analysis. I think it's time to check the general stock market trend. It is my strong believe that a trader, no matter what he/she trades, has time on time to apply technical analysis to the longer-term index charts (Dow Jones Industrials, S&P 500, Nasdaq100 charts) and to evaluate the current stock market stage in order to adjust or change used trading strategy.

A trader can develop and have permanent trading system (set of technical indicators and rules that generates trading signals). Yet, if a strategy of using this system is not adjusted to the general stock market stage then, no matter how good a trading system is, this trader risks to face the system failure sooner or later. The stock market is a live creature. It is in the constant move, it is in the constant change and it is in the constant adapting to the new trading rules, to the new generations of traders, new values of the society, etc. If you are looking for some "Golden Trading System" that require no studying, no monitoring, no work, but just sitting on the couch and calculating a profit then instead of becoming a trader you should spend your money on beer and recreations - at least you receive emotional satisfaction.

There are several examples of simple trading strategies that adjust a system to the longer-term stock market trend. I just want to mention a few of them as a reference to my point of importance of longer-term technical analysis.

Simple Trading Strategy Example #1:

If the longer-term trend could be defined as an up-trend then the strategy of using trading system can put more weighting on "Buy" signals:

• ignore weak "Sell" signals and trade only strong and confirmed "Sell" signals to open a short position;
• trade all "Buy" signals, including the weak ones;
• have a tighter stop-loss strategy when short trade is opened;

Controversially, when the longer-term trend could be defined as a down-trend a trading strategy of using a system could be emphasized on using "Sell"’ signals

• ignore weak "Buy" signals and trade only strong and confirmed "Buy" signals to open a long position;
•  trade all "Sell" signals, including the weak ones;
•  have a tighter stop-loss strategy when long trade is opened;

If the results of the analysis show that the stock market is in a sideway move then a trader may apply equal weighting to "Buy" and "Sell" signals – treat them in the same way.

Simple Trading Strategy Example #2:
(even simpler than the previous strategy)

Stop trading and stay in cash when the longer-term stock market trend could be defined as down-trend and go back in to the stock market when the stock market is in the up-trend.

Selection of a trading strategy depends on what you trade, how you trade (how many trades you made) and how much you trade (how much you invest into a trade). It is essential time on tine to take a look on the general market picture and see where the longer-term trend is going. If you have longer-term technical analysis behind your trading strategy then the odds your trading system is successful are much higher.

In my next post I'll try to show my personal view on the longer-term technical analysis with a reference to theS&P 500 chart.

Technical Analysis

In my last "Trading Strategy" post on November 8, 2009 I have mentioned a possibility of the indexes (Nasdaq 100, S&P 500, DJI, etc) stacking in a sideway action at their October's high levels. The next day, on Monday November 9, 2009 we still had a strong advance and since then the rest of the week we may see that the indexes have been trading mainly sideway (see the S&P 500 chart below): the S&P 500 index exactly at its October's high levels, the Nasdaq 100 index a few points higher and the DJI index has made new 13-month high.

The S&P 500 Chart with elements of technical analysis:
Selling/Buying Volume Oscillator, Advance/Decline Oscillator, MarketVolume Oscillator,
MACD, RSI, Stochastics, McClellan Oscillator, Average True Range in Percents.

In technical analysis it is common to take a look at the history, and from the history you may see that in majority cases sideway trading at new high level ends with a correctional move down. As a rule during this sideway trading you may see strong bearish signals. If you take a look at the chart (S&P 500 chart above) you would see that on Thursday, November 12, 2009 all technical indicators (except volatility indicators) have generated strongly bearish signals. Yet, on the next trading day (Friday, November 13, 2009) the indexes bounced up from their lower level of the sideway corridor (see the same chart above).

Last week I mentioned: "At that time (in September and October) the indexes have been moving sideways for several trading days … we may see some sideway action at this level again ... If the market starts to move sideways the odds are high that the technical indicators will become bearish." That is what we saw on charts: sideway move and bearish signals on Thursday. However, in the same post I have brought some reasons why I would not consider these bearish indications as strong signals, and why I would rather consider waiting. There were two main reasons why I would avoid trading short at that moment: a) no high volume during the up-move and b) no increase in volatility.

Absence, of high volume during up-move indicates that this up-move was not strong enough to generate greedy buying when investors start to rush into the stock market with the hope to jump into "the last wagon of the running train" - as a rule such action leads to a misbalanced in the supply/demands and at least to the short-term correction down. Absence of increase in volatility indicates that the current sideway move did not generated any panic among traders which suggest there were no increase in the number of bearish traders as well. These two reasons kept me last week from trading short, and the same two reasons still keep me out of it.

Right now technical indicator on the major index charts (S&P 500, DJI and Nasdaq 100 charts) are mixed. You may see Bullish indicators as well as some indicators remain bearish:

 - SBV (Selling Buying Volume) Oscillator is moving sideways at this moment which is a neutral sign. Yet, the bullish volume (accumulated since November 4, 2009) still could be considered as a force which is strong enough to push the stock market down into a correction.

 - The absence of the Bullish volume surges (no green MVO) suggests the higher odds of further up move.

 - The advance/decline oscillator is almost flat, yet, it moves up from its most recent low which could be considered as modestly bullish signal.

 - The same as A/D Oscillator, MACD is almost flat, yet, it is moving up from its recent low which is bullish sign, on the other hand it is still in the negative area which could be considered as bearish sign. Overall, MACD could be considered bearish with tendency to become Bullish.

 - General RSI direction is down and this is bearish sign in technical analysis.

 - General Stochastics direction is up and this is a bullish sign in technical analysis.

-  McClellan Oscillator is still in the negative territory which is bullish, yet, it is very close to cross the center (zero) line which in technical analysis is considered as a "Buy" signal.

 - ATR remains on the same level and this is very nice indication (as already mentioned above) of bullish sentiment."

Overall, I would consider technical analysis mixed at this point of time. There is still an existence of a danger of a correction down. At the same time, some technical indicators push me to believe that even if we see a correction it should not be a very strong move down, unless I see at least changes in volatility sentiment (increase in volatility). At the same time indication of resuming of up-move are not strong enough to be strongly Bullish.

I am not stating that I am always right, and that my technical analysis is perfect. I am just trying to share my thoughts about current stock market sentiment and possible development of a future market trend. It helps me to put my thoughts in the order and I hope it may help somebody in avoiding a mistake that can become "financial suicidal". I would rather recommend doing your own technical analysis and checking all my statements by yourself before even considering to follow them.

Trading Strategy

Those who follow my blog should remember what I said a week ago in the "Advance/Decline" post on November 1, 2009: "Yes, if we take a look at major technical indicators (beside volume and advance/decline) we will see that almost all of them are bearish and suggest the higher odds of further decline. However, I would not be very sure in this and personally I do not hold any short position right now. Yes, we still may see some decline, however based on my experience working with volume and advance/decline data I would consider possibility of coming reversal and I would monitor index charts more closely for bullish signals that may confirm my analysis."

Now, you may see that indeed extremely low advance decline readings in the S&P 500 index indicate coming reversal and uptrend. If you take look at the hourly index charts (S&P 500, Nasdaq 100 and DJI) you will see that already on Monday November 2, 2008 by the end of the trading session MACD and Stochastics have became Bullish, shortly after the market open on November 3, 2009 Advance/Decline Ratio and RSI became Bullish and by the end of the trading session on the same day McClellan Oscillator and SBV Oscillator indicated Bullish sentiment.

Strong up move during the rest of the week has pushed S&P 500 and Nasdaq 100 indexes to their high levels on September 17-23, 2009 and DJI index to its high on October 16-22, 2009. At that time (in September and October) the indexes have been moving sideways for several trading days. Furthermore, I would say that we may see some sideway action at this level again. Actually, we already started to see slowdown in the recent rally up and some of the technical indicators started to show tendency to become bearish. If the market starts to move sideways the odds are high that the technical indicators will become bearish. However, personally, if this is a case and technical analysis starts to generate bearish trading signals I would not wait for a strong correction. There are several main reasons why:

 - The recent correction has generated high volume surges at its support level, yet we have not seen any increase in volume during the resent recovery. Furthermore, I may say that the recent recovery did not generated waves of greedy buying which could change a supply/demand balance.

 - The market becomes less volatile which could be clearly seen on the VIX index (volatility index) decline. As a rule a decline in volatility suggest that the market becomes more stable and higher odds of up-move.

 - During the recent decline we saw twice the S&P 500 hitting extremely low advance/decline readings (on October 28 and October 30, 2009). This suggests that the marker became strongly oversold at its support level. So far I do not see any indication of market becoming overbought.

Overall I would say, yes, if technical analysis starts to generate bearish signals we may see some sideway move and even a correction; however I would not consider the bearish trading signals as a reason to open a short trade in the current market stage. One of the conservative and safe trading strategy when the longer-term trend could be defined as bullish could be described in two simple rules:

Rule #1: Open a long trade when you see Bullish signals;

Rule #2: Stay in cash and wait for Bullish signals when you see Bearish signals.

Advance/Decline

In my previous "Advance/Decline and Volume" post on October 26, 2009 I have expressed that from the point of my personal technical analysis I see a dominance of Bearish market which was confirmed by decline on the stock market during this week. In the same post I have mentioned that I do not know when to expect a reversal, yet, I have pointed that I would monitor indexes (Nasdaq 100, DJI and S&P 500) for high volume surges during the price decline and the S&P 500 index for low advance/decline readings.

Actually we had very low advance/decline volume and issues ratio reading on the S&P 500 index on October 28, 2009. However on that day the critically low Advance/Decline readings were not supported by high volume. Still we had strong bounce on the next day (on October 29, 2009), which looked very promising, yet on Friday October 30, 2009 we had record decline again.

October 30, 2009 is an interesting day. On that day we had high volume on all major indexes and advance/decline volume and issue ratios have dropped to critically low readings again. (You may see the S&P 500 index advance/decline reading at
http://www.marketvolume.com/quotes/advance_decline_sentiment.asp?s=SPX). These two factors suggest that there is a possibility that the market become oversold. In this case volume and advance/decline indicators perform as leading (trend-predicting) indicators that suggest a possibility of a reversal. Yes, if we take a look at major technical indicators (beside volume and advance/decline) we will see that almost all of them are bearish and suggest the higher odds of further decline. However, I would not be very sure in this and personally I do not hold any short position right now. Yes, we still may see some decline, however based on my experience working with volume and advance/decline data I would consider possibility of coming reversal and I would monitor index charts more closely for bullish signals that may confirm my analysis.

As a rule the indexes always react on high volume and low advance/decline data during the price decline by a reversal. There could be occurrences when it could be ignored, however it usually happens during the longer-term recessions or during the stock market crashes. I do not think that the logger-term market is in any of those stages right now. Furthermore, despite bearish signals on many indicators I would rather stay in cash and wait for some bullish signals that may confirm my analysis.

In one of my next post I will try to show my thoughts about longer-term trend. I think, now, the stock market is not the same as it was six month ago and I think it could be interesting to take a look at longer-term index charts (S&P 500, DJI and Nasdaq 100 charts) to see the general tendency of the market movement.

Advance/Decline and Volume

It's nice to be right - see my yesterday's "Volatility" post. Yet, the first tree hours of today's trading session were somewhat disturbing. I think every trader has the moments when from one side the logics tells that the market should not go that way (in my case it should not go up) and from other side there are emotions that it goes in opposite to the expectetions way anyway. I believe many of those who read my blog yesterday were somewhat skeptical during these first three hours. Yet, by the end of the session I think the points mentioned in my last two posts should make some sense.

I understand that sometimes it is difficult (especially if you are reading this first time) to follow my my technical analysis, especially when I do not post a chart snapshoot. As a rule I always use a set of technical indicators you may see in the "S&P 500 Chart" post. You may always get the same chart atwww.marketvolume.com. I'm not telling that you have to rely on the results of my technical analysis or follow my steps precisely. Every trader has to do analysis by him/herself. I'm just trying to share some of my experience in the analysis and if somebody can learn something from this it makes me happy.

Just a few thing that I would like to drag your attention to. The market is down and the sentiment becomes more bearish. During the today's decline in period from 11:30 until 12:00 EST we saw a big volume spike. As a rule volume spike during the price decline means panic selling and could reverse the trend up, yet it was not the case. It is a bearish sign when the indexes ignore volume spikes to the price downside. Another bearish point is the further increase in the volatility.

If we are in a correction  and you ask me when we may expect to be back in uptrend I will answer "I do not know". I may only say let's watch the charts - we may see reversal tomorrow we may see it in a week. In particular I would be paying more attention now to the volume surges (low negative MVO) on the Nasdaq 100, S&P 500 and DJI and advance/decline issues and volume ratios on the S&P 500.