Jittery, on balance...

As we've addressed herein ad nauseam, the media forever angles for an explanation -- often a single event or development -- as to why the market does this or that on any given day. Well, as for today's 90-point hit to the Dow (no huge deal of course), the President's threat to shut down the government is as good as any -- actually, probably better than most.

But, you know, the short-term internals of late haven't been all that hot anyway. Another thing we remind incessantly is that the market (all players collectively) has to be in the mood for a dip before, for example, a politician's ill-timed, untutored, inexplicable (take your pick) bluster can (or so it appears) blow the market through some previously established support level (like the 2450 level and the 50-day moving average the S&P 500 recaptured in yesterday's rally):

Click to enlarge...


In terms of the mood of the market, we've noticed that the bears seem to own just a bit more conviction these days.

We get that based on what we call the daily "on balance volume", or OBV. 

Volume (daily, in this example) by itself is simply the number of shares of a given stock, or, with regard to an index (such as the S&P 500), a group of stocks, that trade hands during a given session.

Two things worth considering when gauging the mood of the market: One would be the trend in total volume over a period of time, the other being an assessment of when (up days or down days) the higher volume days are occurring (that would be the OBV).

Total volume simply gives us a feel for overall trading interest, while OBV gives us a clue as to where the strength of that interest (however intense it may be) lies -- in the buying or in the selling (i.e., among the bulls or the bears).

Here's a look at the 15-day moving average of the S&P 500's daily volume (note the recent decline):



Okay, so volume's thinning a bit of late; suggesting that we shouldn't get too excited one way or the other. I.e., yesterday's 200-point jump in the Dow occurred on relatively light volume (not much conviction), same goes for today's 90-point decline. In other words, traders are simply biding their time.

Time-biding notwithstanding, it's still worth taking a look at which side of the fence presently embodies the most passion.

In the next two charts we'll show how OBV can aid us in that endeavor -- as well as how it might offer a clue into directional probabilities going forward.

Here's a look at the S&P 500 moving essentially nowhere from late May to mid July:



Market technicians search for trading patterns that'll help them gauge go-forward probabilities. The above would be your classic "descending triangle". Its message being that bears are so eager to sell every rally that they overwhelm less passionate bulls at lower and lower post-bounce levels. Probabilities, therefore, favor an ultimate breakout below support (the horizontal line) as the weaker bulls finally throw in the towel. Dang, if it were only that easy!

Here's what took place during the rest of July:



Oops!

So what happened? We thought the bears were in control! Well, we could devote a whole page to how when such patterns are even slightly, and unexpectedly, broken to the upside, over-extended shorts (bears) may panic and cover, which can turbocharge the shares right into a whole new trend -- or some other fancy hypothetical -- but we won't. 

Instead we'll add the OBV chart which shows, interestingly, that the higher volume days were actually occurring on the bounces off of support (the up days). Portending an ultimate upside breakout of what otherwise was a bearish chart pattern:



So how is it that the bulls were really in control while the upward spikes were peaking at lower and lower levels? Well, we could devote a whole page to a description of how some players are adept at accumulating shares slowly over time to garner the best pricing ahead of an ultimate upside breakout -- when they sit back and watch everyone else pile in and make them richer by the day -- but we won't. 

Suffice it to say that if you ever decide to try your hand at trading (which I distinguish from investing) understand going in that you'll be facing some stiff competition; professionals, that is, who know the nascent trader in you better than it knows itself.

By the way, did you happen to notice the OBV line trailing off while the S&P was trending higher?

I'll add the lines:



Yep, you guessed it! 



Those sneaky now ex-bulls quietly snuck their way out without blowing out the index -- ahead of the recent pullback. And/or, short-term players are simply getting jittery ahead of what is typically the roughest time of the year for stocks. 

Bottom line: When the prevailing market mood is essentially jittery, an ill-timed (or whatever) speech can easily shave a few percentage points off of the major averages.

Of course this is all short-term stuff that really doesn't factor into a thoughtful long-term investment strategy. It just offers a little insight into what's actually occurring beneath the headlines. 

In our upcoming weekly message we'll offer a more meaty, longer-term analysis.