Market Direction While Lower Still Means Opportunities For Gains

Sorry for not posting sooner, but in Canada where I live this is a long weekend so the Canadian Stock Market is closed for today and I have been enjoying the warm weather this weekend and visiting with friends. The stock market direction appears ready to bounce on Monday looking at the futures before the market opens. Based on the market timing technical indicators there is no way the market direction will regain its footing at this level but will move lower.

Market Direction Chart

The S&P500 one year daily chart is below. I have added the rate of change and set the parameters for 30 days. The other market timing technical indicator is MACD or Moving Average Convergence / Divergence. I could add more but these two are all we really need to look at the one year chart for the S&P 500 stock market.

The Trader’s Almanac indicated that MACD gave a market direction down call on April 3 which they have used to advise their clients to leave the market and buy bear etfs. Personally they might have been early but it really doesn’t matter. They were looking for the “sell in May” exit point. Personally I took the May 4 rate of change call and confirmed by MACD the same day for the narket direction down call in the S&P 500.

The rate of change laid out over the year shows just how powerful that indicator can be when the settings are adjusted to 30 when spread out over a daily one year chart. I discussed the Rate Of Change market timing indicator in my article on May 9. As a market timing system the Rate Of Change is very good particularly for those who want to catch the majority of a market move. Indeed an investor could use ultra type ETFs for both up and down moves and profit handsomely in either direction.

MACD or Moving Average Convergence / Divergence is another great market timing system that can also be applied to many different scenarios from daily all the way through to weekly. MACD is excellent at spotting those periods when it is best to be in the market and to be out.

Market Direction is Lower

Market Direction Chart for May 18 2011 to May 18 2012

Market Direction And A Coming Bounce

The market as I explained on Friday, is extremely oversold and really needs a bounce. Once that bounce happens and it looks like there could be one Monday morning, any long positions I am holding will have covered calls established. If I have existing covered calls I will be buying them back and rolling them lower. Many covered calls investors tend to roll into the October to January period at lower strikes as they want to get some protection and at the same time earn some income. This also will put them into the prime “move back up” period in the market.

When they sell their covered calls on long positions during any market bounce, they will hold them through the summer months and then buy them back before the fall season gets underway as the stock market typically is stronger in the November to April period. If the market should pull back strongly over the summer months they will have earned some decent protection.

I will post an article this evening detailing out how I sell these type of covered calls and how I close them and what signs I look for.

This strategy worked very well last year as the market experienced a severe summer correction and then recovered in the fall.

Market Direction and Bear ETFs

This next bounce could be the best chance for those interested in bear etfs and who missed the May 4 signal to get out of the stock market. For the gamblers the Ultra Bear ETFs can provide two times and three times the collapse of the stock markets. For the less adventurous standard 1X Bear ETFs simply follow the market lower.

Market Direction and SPY PUTS

For myself I prefer the SPYDR 500 Spy Puts. This has been my hedge of choice and I prefer the daily trading that it provides, but it is not a strategy for everyone. Those who cannot follow the market daily probably are better in bear ETFs or simply buy SPY PUTS and hold them until the market tries to bottom. All of the above are just my methods and are not trading advice or recommendations. You always trade at your own risk.

Market Direction Summar for May 18 2012

The bull market rally from last November is now a distant memory. Even if Greece in June votes to stay in the Euro the back of this bull is broken. With the S&P 500 slipping through the 200 day moving average there should be a bounce but the market now has little choice but to find support. That means lower prices ahead. The disappointing facebook IPO only adds fuel to the bear fire and any market direction bounce is nothing more than an opportunity to earn profit and prepare for the next leg down.

  • fdb

    I like your SPY put hedge. Would there be an advantage to a covered put. I.E. buy the put and sell the SPY? When right you get twice the action. If you’re really wrong you have limited losses.