Market Direction Outlook For 4th Week of Oct 2012 – Caution

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Market Direction is always the most important aspect of investing. Even for those of us who enjoy Put Selling market direction is important. For investors who do not want to own stocks, caution at this stage is warranted. Even for investors who want to own the underlying shares, Friday’s market direction plunge may mean a wait and see approach could be the best choice. If there is a bounce back in market direction on Monday it could be short-lived and then a move back to test and possibly break through the 50 day moving average. This market direction pull back will mean better put premiums on the stocks we would like to own, so waiting is certainly a decision worth considering.

Friday’s Market Direction Plunge

I do believe the most recent run-up in the markets was caused by a lot of investors believing that earnings were going to be better than analysts expected. But on Friday with companies the likes of GE, IBM, Microsoft, McDonalds and many others reporting slowing earnings, it does appear investor were too optimistic. The recent stock rally was brought about by investors who suddenly felt that the estimates of poorer earnings was probably going to be wrong. Basically investors “gambled’ that earnings would be better than expected and they jumped in to beat the crowd, as it were. On Friday they saw that perhaps they were wrong and they bailed out.

For stocks to remain at current levels or push higher, earnings must improve beyond last year’s earnings by about 10 to 15 percent. This presently appears unlikely which means lower equity prices are probably ahead until earnings can once more push equity values higher and investor sentiment as well.

Market Direction Is About Earnings

Market direction in the end, is always about earnings. Even if Friday’s sell-off turns out to be nothing more than investor jitters and the market direction turns around and moves higher, earnings must improve in order for any higher valuation in stocks, to “stick”. If earnings are not better than any rise is definitely suspect and I will not be buying into any move higher. I plan to continue selling puts options at values I consider appropriate.

Friday October Options Expiry

Friday was October options expiry and I had almost all my positions expiry out of the money. A handful of Coca Cola Stock naked puts at $37.50 had to be bought to closed but most expired freeing up almost half of my entire capital. This is certainly timely if in fact the stock market direction is about to change back to down. To find out what the short-term indicators have to say about market direction, let’s look at Friday’s market timing indicators for the close of the day.

Market Timing Indicators For The Start of The 4th Week

All the market timing indicators are bearish to start the week. Momentum us falling deeper and remains negative. MACD which has been in a sell mode since Sept 25 on the S&P 500 almost turned positive late last week. As of Friday it is continuing with the sell signal and has moved lower.

This signal by MACD on Friday bears significance. The fact that MACD did not confirm the last stock market rally does not bode well for stocks. Lower prices appear to be ahead.

The Ultimate Oscillator has turned negative but is not near oversold so there is lots of room for more downside.

The Slow Stochastic with a K period reading of  54.92 and D period of 61.34 is bearish but not overly. This would indicate that prices will be lower part way through this week but not shockingly low.

The Fast Stochastic is extremely bearish and indicates more downside is ahead for the start of the 4th week of October.

market direction technical timing

stock market direction as determined by short-term market timing indicators

Market Timing Consensus

The market timing consensus is that the market will continue lower. With the S&P 500 and the Dow both back at their respective 50 day moving averages, even if there is a bounce, the technical indicators are signaling that any bounce in stocks should be sold as lower prices lie ahead. This means the 50 day moving averages will break.

Market direction and the 50 day moving average

Market Direction finds the S&P 500 and the Dow back at their respective 50 day moving averages.

The 50 day, as explained in this article on how to spot the next bear market, the 50 day moving average is the first line of support. Once that breaks it will be a simple move back to the 100 day moving average. Heavier selling should arrive once the 50 day moving average breaks as investors, nervous that this could be another dreaded top in the stock market direction, sell out and move to the sidelines.

Candlestick Chart Analysis

For those who follow candlestick chart analysis, Friday’s market plunge ended with a sell signal being generated for the S&P 500 and Dow.

Market Direction Summary To Start The 4th Week of October 2012

To sum everything up, the market direction is down. My market timing indicators on Thursday night were wrong.

Last Thursday after the stock markets closed I wrote “Friday is options expiry and while lately options expiry has not been met with large volatility, you just never know what market direction is going to end up doing on options expiry days. Right now though market direction remains up for tomorrow.”

I should have known that the Google debacle was going to drag the market direction lower. After 4 decades I should remember to use instinct once in a while, but then that’s also why I stay with my SPY PUT trade. Even though I called the market direction wrong I still profited from the downturn and that to me is what is important.

For next week I would not buy into any market bounce or be selling puts in any rise as all the technical timing indicators are bearish and after a day like Friday a fair amount of technical damage was done to the market direction. This damage needs some time to work itself out. Caution is definitely warranted and a wait and see approach should be considered before committing capital which, if the market direction does move lower, could be put to better use at lower stock prices and higher option premiums.

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