Market direction yesterday evening was 3 to 2 favoring bearish sentiment. Only the fast stochastic showed the market direction could be changing and with the market timer indicator Momentum back positive and climbing, it supports the fast stochastic.
But among all the market timing tools I use, one of the most important is the MACD Histogram. This market timer tool is one of the best for technical market analysis and since Thursday of last week MACD has been contracting. On Tuesday and Wednesday as market direction continued to climb, the MACD Histogram continued to fall. This is a strong warning that the rally is not supported and further selling is ahead. Indeed the slow stochastic has warned each day that more selling lies ahead. Both of these market timers have been correct.
This morning the market sold off from the open confirming the overall Market Technical Analysis and market direction predictions of bearish sentiment. However since I have been burned more than once by not following the fast stochastic indicator, I was not holding spy puts this morning and I have still not bought any as of 10:00 AM. In my stock market direction comment yesterday I indicated that I believed we could see selling on Thursday (today) and buying on Friday or vice versa.
With market direction sitting at a pivotal point here, I believe it was best to remain careful when hedging the market direction either up or down. Today and tomorrow could mark important points in the overall market direction for the next few weeks. July is notorious for whipsawing markets and August is often a poor month for the market.
Market Direction Means Put Selling Opportunities
That said, it is the whipsawing such as today’s action that leads to better premiums and the chance to do put selling on stocks out of the money for still decent premiums. Case in point this morning is Intel Stock which is down almost 2% as I write this article. I have sell bids in place on Intel Stock for the $24 July strike at .24 cents for a 1% return for the month. Meanwhile the August $23 strike is already over 1% and I have offers to sell put options for August in at .30 cents for the $23 strike. I am using margin for August’s $23.00 strike.
There are lots of other “deals” available as the market gives back much of the previous two days of gains.
Market Direction and the Fast Stochastic
The Fast Stochastic looks out just a day or two at most which is why I heeded yesterday’s warning from Fast Stochastic that the market could be headed back to the upside. This could still occur particularly if something unexpected does emerge from Europe. Recalling that this morning’s GDP figure was in line at 1.9% for the past quarter and unemployment claims remain in line as well. Right now the US economy is not falling off a cliff and today’s selling is reflecting investor nervousness over Europe and investors taking profits.
Use The Spy Put For Bounces
If during the later morning or early part of the afternoon the market should bounce I will be keeping a close eye on the market timer tool, Ultimate Oscillator to pinpoint buying SPY PUTS but I will not hold them overnight. I have been caught before in what looked like a soft market only to watch it roar back on me just when I thought it was going to fall further.
Market Direction S&P 500 Chart This Morning
Monday’s close was 1313.72 and this morning the S&P has fallen to 1315.34 wiping out most of the past two days of gains. If however the S&P does not fall below Monday’s low of 1309.27, then the market direction remains questionable. This morning’s action shows a lot of support at 1315 in the S&P. You can see in the chart below that 1310-1315 marks a lot of support in this recent correction. As I have mentioned many times in the past, this correction since starting in May has not been as severe as the analysts make it out to be. Market direction has fallen only 10% which is a normal bull market correction. That said, this means there is plenty of room for the market to fall should the recent support level break.
While my market timing indicators cannot pick levels, but can only predict market direction, I think that if 1310 – 1315 level breaks, the S&P will be setting up a second leg lower in the stock market.
Market Direction Morning Comment Summary
To sum up this morning’s action, I remain cautious. I am aware of yesterday’s market technical analysis and the overall bearish sentiment most market timing indicators continue to reflect. Overall the market timing indicators were as a majority bearish throughout the past two days rise and indeed MACD which is among the best market timing tools, continued to contract each day signalling last Thursday that the market upswing was over. MACD Histogram should rarely be ignored. Indeed they are a vital part of my early warning tools to spot a collapsing stock.
If MACD is correct then the chance of the market direction continuing lower remains and the S&P could try to retest the 1275 or 1266 low points from the beginning of this month. There will be lots of opportunity ahead to benefit from market directional moves so while I missed this morning’s downturn by not holding SPY PUT options overnight, I know that investing is a long-term process and opportunities exist constantly.