Thursday, December 05, 2013

Daily Market Commentary: Volatility and Volume Increases

It was to be expected at some point after the holidays, volatility would increase.  However, Tech averages had a relatively quiet day, although the semiconductor index had a wobble of its own.

For the S&P (and Dow), the increase in volatility left the index flat by the close. The index finished on former upper channel resistance-turned-support, with the 20-day MA also seeing a positive test. However, technicals weakened further with 'sell' triggers in On-Balance-Volume and +DI/-DI, with volume picking up to register a confirmed distribution day.  Short term is set up for a bounce, but if this bounce doesn't reverse the technical 'sells', then a larger decline is likely. A close below the 20-day MA today or tomorrow would kill the short term bounce too I think, perhaps bringing in a larger test of the 50-day MA.


Similar story for the Dow, although it finished the day below its 20-day MA, but probably not enough to suggest it has lost support.  Trading volume did not register as distribution.


Small Caps also saw a widening in the intraday spread.  The 20-day MA played as support, as do October-November swing peaks. If you are interested on the long side, yesterday's action means more room is needed for a stop - this risk may make the trade more unattractive, although there is 25 points of upside available on a retest of the high.


In contrast, the Nasdaq 100 remains steady as she goes. Yesterday's action was a small bullish engulfing pattern, the narrow range action facilitating a relatively tight stop if going long.   Nothing bearish about this chart.


Tech averages have been supported by a strong semiconductor index.  It's recent breakout had a little wobble yesterday, but it hasn't 'bull trapped'...yet.


Short term, the upside play in the Russell 2000 got a little more unattractive with a widening of the volatility: the risk:reward ratio may force traders to look elsewhere.  The Nasdaq/Nasdaq 100 is perhaps the best long side opportunity, although if the semiconductor index 'bull traps', then I think this trade will fade quickly too. Large Caps looking vulnerable, even if still siding with the bulls.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com.
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