Volume, Advance Decline and Volatility

I have decided to make a quick post - something that I usually do not do during the week. As a rule, I update my blog during week-ends, yet, there is some stuff on my opinion worth mentioning.

I would recommend checking three things:
a) today's daily volume on indexes (Nasdaq 100, S&P 500, DJI and others);
b) advance/decline issues and volume readings on the S&P 500 and NYSE;
c) volatility level on indexes (the same set - Nasdaq 100, S&P 500, DJI)

You may try to compare today's decline with decline we had on April 16, 2010:
1. The same as on April 16, we had very high volume surges during the indexes' decline, yet these volume surges are not as big as those that we saw on April 16, 2010 (today's volume signal is weaker).
2. The same as on April 16, we had today extremely low advance/decline issues and volume readings on the S&P 500 and NYSE indexes, yet today's readings were much lower (more extreme - today's advance/decline signal is stronger).
3. Current volatility is growing and is higher than we had on April 16, 2010.

The first two points above would suggest bounce up which could be similar to the one we had after decline on April 16, 2010. The last point (volatility) suggests that we could be on an edge of a strong correction. I think, there will be a reaction on the first two signals (volume and advance/decline signals) as some up move. I would not try to guess now how strong this up-move could be. If I do not see an up-move reaction then I would not expect to see a strong correction.

Volume and Volatility

It's nice to be right. In the last two paragraph on my last report (see "Volume and Advance Decline Post" on Sunday April 18, 2010) I mentioned "...the stock market ... does not crash suddenly ... It is custom to see side-way trading and increase in volatility ... I would assume that we may see the indexes moving back to their recent highs. The volume surge during the Friday's decline itself may push indexes higher. The third factor pointing to possibility of rebound up is critically low advance/decline volume and ratio reading on Friday 16, 2010 ... I do not expect Friday's decline to grown into strong correction, at least not at this time."

The indexes (S&P 500, Nasdaq 100, DJI and others) have not just bounced back to the most recent highs, but many of them run over by hitting new high levels.

At the current moment many investors (I guess) asking for how long and how far will the up-rally (started in the first half of February, 2008) go? I bet many traders (including me) expected down move in the March 2010 during the side-way trading (see the "Resistance Corridor" post on April 3, 2010). Yet, the market continued its rally - that is why it is recommended to be sometimes a little bit more conservative (see last three paragraphs of the same "Resistance Corridor" post).

Now, by the end of the week many technical indicators remain positive by suggesting good odds for further up-move. Stochastics and RSI are above 70 and 80 lines respectfully. Advance/Decline volume and issues are positive as well. Money Flow indicators remains positive as well.

Despite all the positive indicators, there are two things that are worth paying attention to: high daily volume over the last two weeks and increase in volatility. The last two weeks of trading (starting from April 13, 2010) has been supported by high daily volume: huge volume surges during the April 13-15 up-move, even stronger volume surges on April 16 when indexes dropped down and still strong high volume surges during another strong up-move on April 17 - until now.

The second negative factor is an increase in volatility. As a rule increase in volatility suggests bearish mood and usually higher volatility is witnessed during a decline. This is not a good thing to see market rising on high volatility... At the current moment volatility raised to the level it was in January 2010 (during correction down). And increase in volatility on high volume during up-move is not very good sentiment...

Even technical analysis results suggest good odds of further up-move, because of high volume and increase in volatility, I would be very cautious. If volatility continues to grow or stay on the same level and we see sudden strong drops and strong bounces up, then I would expect to see a correction which could be stronger that the one we had in January 2010.

P.S. For monitoringVolume, Advance/Decline data and volatility for major US indexes and Exchanges (NYSE, S&P 500, DJI, Nasdaq 100, Russell 2000, etc) I would recommend visiting MarketVolume.com web site.

Volume and Advance Decline

I guess now, at the end of the week there should be no questions that the high volume surge may lead to the shift in supply demand balance and reversal. In current case, strong volume surge during the price up-move pushed the market into situation when those bullish traders who wanted to buy bought and the number of bullish traders who still wants to buy became too small to continue feeding price up-move. As I mentioned in my "Big Volume" post on April 14, 2010: "institutional investors decided to dump ... to bullish traders...". The number of dumped shares on April 13-15, 2010 was quite big and basically it changed the balance of bullish and bearish traders.

Of course, the one may say the market dropped down because of the "Goldman Sachs". I do not consider that this is the reason for the drop we had (unless institutional traders, who dumped on April 13-15, knew about this far ahead and they manipulated the market). Of course, it may amplified the decline, yet, it would not happened if the market would not be overbought. The market declines after high volume surge during price up-move. It has to decline to restore supply/demand balance. In the same way, the Google shares declined despite the record profit.

The media will always explains any market movement as a result of some news. Media sells news and if nobody relays on news then media will not be needed. That is why they do it. Personally, I do not build any trading decision on news releases. Following news release, on my opinion, is equivalent to obeying the commands of those who try to manipulate the stock market.

Coming back to strong decline we had on Friday April 16, 2010, I would say that it was not an ordinary decline. The decline was quite strong and volume during this decline was even stronger than the volume generated on April 13-15 during the price up-move.

As a rule, the stock market (when I mention stock market I assume main indexes: S&P 500, DJI and Nasdaq 100) does not crash suddenly, especially after prolonged in time advance. It is custom to see side-way trading and increase in volatility first. That is why I would assume that we may see the indexes moving back to their recent highs. The volume surge during the Friday's decline itself may push indexes higher. The third factor pointing to possibility of rebound up is critically low advance/decline volume and ratio reading on Friday 16, 2010.

Overall, we still may see some push down, however, I do not expect Friday's decline to grown into strong correction, at least not at this time.

Big Volume

Another day on the high volume - now, we may see it on almost all indexes. Still, the Russell 2000 index has the biggest volume surge.

I think something is going on. As you know, volume is always two side transactions and the number of sold shares is always the same as number of bought shares which is equal to volume. Price moves up because there are traders willing to buy at higher than the current market price. Big volume surge at high price means that somebody (who has huge number of shares – could be institutional investors) decided to dump those shares to bullish traders and fix profit.

Russell 2000 Volume

I usually do not post during the week. So, just a quick note for those who track indexes, especially for those who trade Russell 2000 index and its derivatives (Russell 2000 emini...):

Check the volume in the Russell 2000 sector over the last two trading sessions - I have not see something like that in the Russell 2000 sector since September 18-19, 2008...

S&P 500 Chart

Last week I have mentioned about side-way trading and waiting until upper or lower resistance lines is broken. Majority of indexes (including Nasdaq 100, S&P 500 and DJI) have run about their high levels (resistance levels) which were set in March, 2010.

The one may notice that even we had overbought signals, sometimes (as I mentioned a week ago) it is good to wait for a confirmation signals. The main indexes (nasdaq 100, DJI, S&P 500, etc) have run above their March, 2010 resistance levels and such move could be considered as a possibility of resuming up-trend. Only a few indexes remained in side-way action. Some of them are Nasdaq Biotechnology, Nasdaq Health Care, and Nasdaq Insurance (see my "Nasdaq Health Care" post). The strongest up-move has been seen in DJT (transportation) sector.

If a week ago technical indicators where mixed and some of them were pointing on possibility of down move, by the end of this week, most of them became bullish. Only some of the volume based technical indicators (see negative divergence on SBV Oscillator on the S&P 500 chart below) remain to indicate overbought levels.

Despite the fact that we may see big bullish volume accumulation, the volatility has drop to its lowest level. Last time such low volatility has been seen in the S&P 500 sector in 2007. The S&P 500 volatility (I refer to daily ATR – Average True Range) was at these levels in period from the middle of 2003 until the middle of 2007 (4 years). As a rule low volatility is an indicator of stability.

Below you may the S&P 500 chart with some technical analysis

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

Resistance Coridor?

Two weeks of side-way trading are behind (for some indexes it was a third week). As I mentioned last week in my "Nasdaq Health Care" post (March 28, 2010) "The longer we stay at top (possible resistance level) the more shares (bigger volume) are traded at high price and the more overbought market is."

I think, there is no question that we are at some resistance corridor. There should not be discussion that positive money flow since February 2010 has pushed stock market into overbought condition. The only question that could be placed now is where the market will go from this side-way trading. Will it go into a correction (which I consider would be healthy)? or will it continue to go up on ... positive unemployment report (nothing more positive comes to mind)???

One of the simplest strategies (that could be used in the current situation) is waiting for indexes (S&P 500, DJI andNasdaq 100) to break their resistance corridor lines. Over the last two weeks, the upper line of the resistance corridor could be drawn through March 25 and April 1, 2010 highs. If the indexes break this line on their up-move then we may start to think about resumption of up-trend. The lower resistance corridor line could be drawn through March 26, 20010 low. If the indexes drop below this line we may start to think about a correction down.

On my opinion, this is very simple (no complicated technical analysis has to be performed) and very conservative approach. The gap between upper and lower lines of the resistance corridor is only about 2%. Yes, the market has been in up-move for two months. Yes, the indexes are overbought. Yes, many mid-term indicators suggest good odds of correction down. However, I am not a follower of guessing the highest points to sell and lowest points to buy, especially in case of mid- and long-term trends where 1-2 percents are not as important.

There could be other strategies used to confirm the exit from the current sideway trading. Personally, in addition to the resistance lines, I would watch volatility (increase in volatility would indicate increase in bearish mood among investors) and money flow (in the current moment money flow is on the way to become negative).

Nasdaq Health Care

I'll try to make short post this week. Last week in my "Technical Analysis" post on March 21, 2010 I have stated "Overall technical analysis became more bearish over the last week, mainly because of the Friday's decline. Many technical indicators started to show bearish signs. Yet, I would not disregard high volume during the Friday's decline. This volume may push indexes back to the most recent highs." - yes, we had push back, yet the market dropped down and the stock market (Nasdaq 100, S&P 500 and DJI indexes) is where it was two weeks ago (on March 17, 2010)

As I mentioned two weeks ago "I would prefer to stay in cash. On such overbought indexes I think it would be too risky to trade "Long" and 1% of gain over five day does not worth a risk. At the same time it could be a little bit early to open a short position." (see "High Volume and Volatility" post on March 14, 2010) I would continue to stay on the same note. It is better to stay in cash during uncertain market then risk for one percent move.

Yes, the volume and volatility suggest that the market is predisposed for a correction down, yet, I would wait for a conformational signals. Taking into account that we had another week of almost side-way trading I may say the the market became overbought even stronger. The longer we stay at top (possible resistance level) the more shares (bigger volume) are traded at high price and the more overbought market is. Actually, over the last week we had some increase in volatility as well which is a bearish sign. Should we see further increase in volatility it would increase (on my opinion) the odds of a correction.

Just a thought: we still have not seen reaction of the Wall Street on the Health Care Bill... Personally, I would try staying away from buying stocks of insurance and health care companies. If you have access toNasdaq Health Care index, check it - this index only 1 point below its highest historical level which was hit in 2008. Pretty strong rally for this index over the last 12 months. Do you think it will continue to go up???

Technical Analysis

In my previous post (see "High Volume and Volatility" post on March 14, 2010) I mentioned that the market is predisposed to the correction and that I expect to see some side-way trading with preference of staying in cash. Over the last five trading sessions (a week) we saw some up-move with a decline on Friday. At the end of the week, the indexes are about 1% higher from the previous week close. Some may consider it as side-way trading, some may consider it as continuation of up-trend. I would continue to stay on the same position I was a week ago: I would prefer to stay in cash. On such overbought indexes I think it would be too risky to trade "Long" and 1% of gain over five day does not worth a risk. At the same time it could be a little bit early to open a short position.

My position of "staying in cash" is based on the same technical indicators I mentioned a week ago: strong bullish accumulation (result of positive money flow since beginning of February 2010), High volume surges during the price up-move and some increase in volatility. All of this suggests the market (based on the S&P 500, DJI and Nasdaq 100 indexes) is predisposed to the movement down.

Overall technical analysis became more bearish over the last week, mainly because of the Friday's decline. Many technical indicators started to show bearish signs. Yet, I would not disregard high volume during the Friday's decline. This volume may push indexes back to the most recent highs. On the other hand this decline may grow into correction down.

I know that my posts sometimes could look confusing. On very rare occasion I clearly state my view on the possible future trend. However, if you have at least some knowledge in the art of technical analysis I think you can get some of my ideas, compare my technical analysis with yours and maybe find a correct answer. If you are looking for a straightforward opinion and straightforward signals, I am sorry, this blog is not for you. In this case I would recommend going to payable services and get some auto-trading advices.

High Volume and Volatility

Last week (see "Low Volume and Volatility" post on March 7, 2010) I have talked about possibility of flat trading as indexes come to the January 2010 high levels. Now the indexes are at those levels. The past week could be considered slightly positive (the indexes gained modestly over the week), however we may see slow tuning into sideway trading. Actually, that DOW Jones Industrials (^DJI) index has been already moving flat over the last four trading sessions.

A week ago I mentioned "I would say based on the January's oversold levels and that we did not see any strong bullish volume surges we may expect that the indexes may still go higher. Low volatility and quiet trading would confirm that." Now, we have a different picture. Last four trading sessions the S&P 500 index has been trading on high volume. We do not see a strong volume increase in DJI sector. However, as mentioned above the DJI index is already in side-way action. Two trading sessions on the modestly higher volume in the Nasdaq 100 sector cannot be considered as serious threat, however, the Nasdaq 100 index had 13 positive sessions in a row. I have checked 10 years of the Nasdaq 100 history and I found only one period when the Nasdaq 100 index had more than 10 positive sessions in a row: it was in July 2009 - 12 positive sessions in a row.

If a week ago I hesitated to call indexes overbought, now, I would start considering that the Nasdaq 100 and S&P 500 indexes could be overbought. If you check volatility, you would see that we have increase in volatility as well. While one may explain an increase in volatility by coming Triple Witching week when options index options and futures expire, the other may consider an increase in volatility as an increase in activity of bearish traders.

In summary, I would say that even many technical indicators remain bullish, the results of my technical analysis indicates increased odds of side-way trading with possibility of developing a correction. In technical analysis volume and volatility are considering as leading indicators that signal when the market (indexes and stocks) are predisposed to change its trend. Now, as I see we have such signals. Furthermore, I would prefer to stay in cash by waiting for confirmation signals. I could be wrong and stock market could continue going up, yet, right now the indexes are at very sensitive levels.

Low Volume and Volatility

Another week of bullish trading and indexes (S&P 500, Nasdaq 100 and DJI) have climbed close to their January 2010 highs. In my "Money Flow" post on March 1, 2010 I wrote "I would say that results of my technical analysis are still Bullish and I see good odds of market moving higher. On the other hand, there is a possibility of volatile side-way trading in the same range the stock market is now". This exactly what happened this week - three day of flat, side-way trading and then up-move to the January's highs.

On January 31, 2010 in my "Technical Analysis" post I have talked about coming reversal and on February 4 and 7, 2010 in "NYSE Advance/Decline" and "S&P 500 Chart" I confirmed that the market hit the bottom. In one of my posts I mentioned that at that time the market was strongly oversold and it had power to climb back to the November-December 2009 flat levels and then to the January 2010 highs.

As a rule, when I look at the longer-term charts, I'm not trying to where the market is going to be in a month or two. When a trader (technical analyst) is trying to say where the market is going to be in a month he/she could run into situation when he or she can become relaxed and miss some important and critical events. I look at charts every day (during the trading session and after the market close). When I look at longer-term charts I have made a habit do not analyze where the market /indexes or stock could be in a month but rather say how strongly overbought or oversold market is and what is currently moving longer-term trend. I'm not stating that everybody has to do it, yet on my own experience I found that this is the best way to come to the longer-term charts and longer-term trends.

When somebody tells you that his technical analysis results tell him that the Dow Jones Industrials (^DJI) will be 6% up within a month, I would only tell that this person is a gambler who sells himself as a pro. You cannot tell where the DJI could be in a month. Anything could happen during this time. You may say that the DJI index has power to run 6% up, however, depending on how it runs, it could be 3% run or it could be 15% run. That is why when you make a statement about future trend and this statement is confirmed, it still could be highly recommended to monitor how predicted trend goes.

Now, when the indexes came close to the January's highs I think it could be useful to take a look at this recovery. Even as I said that the indexes (S&P 500, DJI and Nasdaq 100) were strongly oversold by February 5, 2010, we have not see a strong recovery on these indexes. They moved up, however it was very quiet move when most of the time the indexes were in side-way action with only modest advance. The volume during this recovery was stable and this recovery did not generate any strong volume surges. All of this would tell that:

1. The bullish traders are dominant on the market at the current moment, however their pressure is not very strong and they cannot push the price up stronger.

2. Current recovery did not generated any greedy buying when we would see investors rushing into the market and pushing prices up.

3. Current recovery did not generate a strong desire to fix profit a leave market.

I would say based on the January's oversold levels and that we did not see any strong bullish volume surges we may expect that the indexes may still go higher. Low volatility and quiet trading would confirm that. However, I think that the supply/demand balance is only slightly in favor of the bullish traders. One of the scenarios that I'm looking at is side-way trading at January 2010 high levels (it could be higher or it could be lower). If during side-way trading we see an increase in volatility and volume surges then I would recommend checking charts for possibility of another correction.

Money Flow

I mentioned a week ago in the "Advance/Decline" post on February 22, 2010 "... when you take a look at lower time-frames, you may notice that many indicators are overbought in short-term, by signalizing a possibility of some retracement, at least in a short-term. The stock market (majority of indexes) right now is in the range of its side-way trading where it was in period from November 10, 2009 until December 18, 2009 This is another factor that may suggest a possibility of staking in this range for a while...". In the past week we have seen exactly this scenario when the indexes (S&P 500, DJI and Nasdaq 100) stuck in side-way trading. One day we saw indexes dropping down and the next day the strong recovery moved them back to the November-December 2009 highs. Then, we had another day of strong decline followed by another strong recovery. At the end of the week the indexes are almost back at the November-December 2009 highs

Now, after a week of volatile trading, I think a correct question for technical analysis would be to ask if the longer-term indicators (that were bullish last week) are still bullish enough to push the indexes higher toward the next possible "pit-stop". Another question regarding shorter-term technical indicators would be to check if those ones that were overbought in short-term last week are still overbought.

From technical analysis prospective, by taking a look at the longer-term index charts (1- and 2-year S&P 500, Nasdaq 100 and DJI charts) I would say the same I said a week ago. The January's decline was pretty strong and during that decline we had very strong bearish volume surges and extremely negative advance/decline readings. If you check money flow (Chaikin Money Flow, Money Flow Index or SBV) during that decline you may see that the stock market was strongly oversold during that time and accumulated oversold power still has not been released completely. Because of that, I would continue assuming that the odds are still good for further recovery towards January, 2010 highs.

Taking a look at shorter time-frame charts, I would not say that the technical indicators are overbought as they were overbought a week ago. Majority of technical indicators on the 60-day chart are slightly bullish or neutral by suggesting possibility from flat to rising markets. However, you should remember that shorter-term outlook may change any time during a trading session on any day. Furthermore, I would recommend monitoring the shorter-term charts for changes in a sentiment during the trading hours.

Overall, I would say that results of my technical analysis are still Bullish and I see good odds of market moving higher. On the other hand, there is a possibility of volatile side-way trading in the same range the stock market is now. In November-December 2009 the indexes (NASDAQ 100, DJI and S&P 500) have been in side-way action for a month. Now, they have being moving side-way at the same levels for a week only. So, there are still some odds we may see further side-way move.

Advance/Decline

As I mentioned a week ago in the "Flat trading and volatility" post on February 14, 2010 the Nasdaq 100 index is at its January 26, 2010 high, while the S&P 500 and DJI indexes run over their January 26 and February 3, 2010 highs. So, I may only say that advance decline indicators that signaled the oversold level and coming reversal (see my "NYSE Advance Decline" post on February 4, 2010) have been paid out...

I think many traders, including some readers of my blog, were skeptical about reversal on February 4, 2010 after the market close when I published my thoughts about NYSE advance/decline reading. I believe now, those traders may consider re-evaluating their opinion about advance/decline indicators. Advance/decline indicators is not something that would generate signals several times per day. However, I'm ready to wait patiently  (even for several months) in order to have ability to play such perfect signals.

Coming back to the technical analysis, the next question would be whether the indexes will run to their January 19, 2010 high levels. There are several factors that would favor the continuation of the recovery from the recent correction. First of all the, the last week recovery did not generate any volume surges to the price up-side. Which tells that, so far, this up-move is stable and there are no any abnormal trading activity that may cause shift in supply/demand balance in a favor of bearish traders. The majority of technical indicators remain to be bullish, especially on higher time-frames.

On the other hand, when you take a look at lower time-frames, you may notice that many indicators are overbought in short-term, by signalizing a possibility of some retracement, at least in a short-term. The stock market (majority of indexes) right now is in the range of its side-way trading where it was in period from November 10, 2009 until December 18, 2009. This is another factor that may suggest a possibility of staking in this range for a while.

Overall, I would say that the odds are still good for indexes (Nasdaq 100,S&P 500 and DJI) to run to their January 19, 2010 highs (of course not in one trading session). However, shorter-term time-frames suggest possibility of some move down and I would monitor it to see if it may grow into something more bearish.

Please, bear in mind that those are my personal thoughts, and before relaying on my words I would highly recommend taking look at charts and technical analysis by yourself. I'm sorry I'm not posting any chart snapshots today. I think majority of my readers are traders or other people interesting in stock market, who, as a rule has access to charts.

FED Rate Increase

After the market close QQQQ (Nasdaq 100 tracking stock), SPY (S&P 500 tracking stock) and DIA (Dow Jones Industrials Tracking stock) sharply went down around 16:30 as FED announced the rate increase to 0.75%. As a rule FED rate change usually affect stock market in short-term only and as a rule the indexes are very volatile during these announcements. It could be that the indexes will be down tomorrow at the market opening - let's see if they stay the rest of the session in negative area.

Flat Trading and Volatility

As I expected and as I mentioned in my "S&P 500 Chart" post on February 7, 2010 the indexes and the market are moving up from their February 5, 2010 low. Still it's difficult to call this up-move as a strong recovery. 3% on the S&P 500, 2% on the Dow Jones Industrials and 4% on the Nasdaq 100 does not looks like the market is in a mood to show strong reaction on highly oversold indications noted in period from January 29 until February 5, 2010.

Taking look at technical analysis of volume, advance/decline and price based indicators I may say if at the beginning of the week majority of the indicators signaled bullish trend, right now, after one week of almost flat market, we still may see bullish indications yet, these indications are not as strong as they were a week ago. Still, I would say the odds would favor the recovery towards at least January 26, 2010 highs. However, we may see change in the sentiment any trading session.

We should not forget that the stock market has been in the strong up-rally for six months (since the middle of July 2009 until the middle of January 2010). It would be natural and healthy for the stock market to have a strong correction down (as we have now). It is difficult to state how strong the current correction should be in order for the market to resume its up-move. It could be that on January 5, 2010 we saw the bottom of this correction, still there is a possibility that we may see some further recovery and attempt of the market (indexes) to revisit the most recent lows.

The biggest concern that I have at the current moment is that within the last week of almost flat trading we have not seen decrease in volatility. Yes, the indexes (S&P 500, DJI and Nasdaq 100) have moved up couple of the percents, however, this up-move has been volatile.

S&P 500 Chart

I have already mentioned in my Thursday's "NYSE Advance/Decline" post about my thoughts of coming reversal as a reaction on extremely low Advance decline reading in all market sectors including but not limited by the S&P 500 index sector, DJI index sector, Nasdaq 100 index sector and most important by NYSE Composite sector.

When could we expect it? It is possible that Friday's drop down and strong recovery marked the bottom (support level). It could be that we still may see some volatility and slide down... Yet, I consider that we can see up move very soon. Taking into account the volume during the recent correction I would say that the market (indexes) have been strongly oversold and it is predisposed to move up to the February 2, 2010 highs and even to the January's highs.

I understand that many traders are afraid that the recent crush may grow into long-term recession. Personally I do not even consider it right now. Long-term recession and stock market crash does not start suddenly. There should be very bad economical news to trigger recession. Yes, we can see a year of side way trading as it was in 2004 and 2005. Yes, during this sideway trading the stock market can go lower. Yet, I do not think that somebody was able to generate another bubble, unless there are political factors that we not aware of and which that may affect the economy (inability of Government to stimulate economy, refuse from China to buy Treasury Bonds, etc)

Coming back to the technical analysis and by taking a look at my traditional set of technical indicators on the hourly chart I may say that may technical analysis is mostly bullish. Many of technical indicators are showing bullish signs and many of them are on the edge to become bullish:

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

NYSE Advance/Decline

Scary drop, isn't it? In my previous "Technical Analysis" report I have expressed my opinion about oversold market and possibility of recovery. Actually we had 3 days of up-move, yet, it was quiet recovery not a strong one as I expected. Today, in one trading session all gain of the previous 3 days has been wiped out. That is why I always mention that charts should be monitored on daily basis which should provide you with ability to spot in time changes in the sentiment.

From one side today's drop is very scary and I am sure it pushed many traders into panic. From other side it completes the picture. I usually do not make posts during the week, yet today is very nice days from the advance/decline data prospective. Today advance decline volume and issues data have hit very low levels. It happened not only on the S&P 500 index but on all major indexes and exchanges. It was on October 15, 2008 when I saw last time such low advance decline readings on the NYSE Composite Index. Other low NYSE advance/decline readings (yet not as low as today) were noted on November 12, 2008 and on July 22, 2009.

History shows that such low advance/decline readings, especially in the NYSE Composite index, suggest strongly oversold market with high odds of close recovery. So, even the today's drop looks very scary it made me optimistic and I would not bet anything on short trading now.

For reference: Advance/Decline Quotes.

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.