The market direction outlook for Thursday was for stocks to move lower. It would be nice if technical indicators could advise if a move lower or higher was going to be “big” on a specific day, but that is not available. Instead the technical indicators look at the past several days and hours of trading to give their view. The view yesterday at the close was that stocks were definitely going to fall lower.
MACD Warning Of July 8
The most interesting thing about the month of July has been how the Moving Average Convergence / Divergence technical indicator turned negative on July 8 and no matter what happened in the S&P, the MACD technical indicator refused to support the rally higher, it just kept signaling that the market direction was down.
I discussed MACD often in the market direction comments. This was the clue I used to adjust my trading pattern. This is why I mentioned often that I was still looking for opportunities but I would make positions smaller, trade further out of the money, close earlier and often, use less capital, use credit put spreads a bit more often and of course my mainstay, focus on large cap stocks only.
Why The Drop
Today’s drop was a result of a variety of items. The overbought condition of the market has been weighing on stocks for a while. Then there was the inability of this latest rally to push stocks higher and retain the previous chart pattern of advances. Both of these just needed a catalyst to start the selling. That catalyst came from Argentina where the government announced a default on their debt. This is not the first time Argentina has defaulted, but investors hate uncertainty and with that news in hand, the Weekly Initial Unemployment Insurance Claims were released which showed that wages are increasing which means “inflation” which investors worry could mean interest rate hikes sooner rather than later. And then there is the unemployment numbers.
Friday’s Unemployment Numbers
Friday is the biggest number of them all, the monthly unemployment number. Exactly how the unemployment number this time around will impact investors emotions I can only guess at. But overall it is more the uncertainty that investors hate. It is this uncertainty which for a lot of investors was too much and they opened by selling across the board all stocks.
Volume Increased
For the first time in many days, the volume increased throughout the day today as more and more sellers dumped shares as the afternoon wore on. Many investors were waiting for a rebound rally and when there was none over the noon hour, the volume began to rise as more sellers entered the market. Today’s volume was among the highest in many days and signals that a pullback is underway.
Market Direction S&P Intraday Chart July 31 2014
The one minute chart for the SPX for today shows the extent of the selling today and the technical damage done. The market in the morning opened with a big drop that stopped right at the 1956 support level. I have written extensively on the importance of the 1956 level explaining that once it breaks the present rally is over. The SPX held on and tried a feeble rally and then fell below. This was about 10:00 AM. At this point I released the morning investing strategy notes to advise what I would be doing and for those members who were not in the SDOW to consider buying shares on the next bounce as I was expecting the market to fall further.
By 10:20 another rally attempt had pushed the S&P back to 1956 but no higher. This was the rebound I was looking for and since I already had SDOW shares from my purchase yesterday, I bought spy put options. Within minutes the selling picked up and the market continually moved lower with feeble attempts to rally back. By the noon hour the market was sitting at 1940 where there is no support. The market tried to rally but instead drift sideways.
To sustain the present rally, the S&P needed to push back to the 1956 level which is the critical support zone for the present rally. That failed and more sellers arrived pushing the S&P quickly down another 10 points to stronger support at 1930.67 where it closed the day. The S&P dropped a total of 2% on the day and pushed the S&P below the 50 day SMA to within easy reach of the 100 day EMA.
Advance Declines For July 31 2014
Today volumes picked with 4.3 billion shares traded, among the highest in recent weeks. Of that volume, 87% was to the downside with only 11% to the upside. Of issues trading 89% were trading lower with just 9% trading higher.
New lows far outpaced new highs. There were 94 new lows and only 23 new highs. This though is not a sign of a correction yet. The new lows need to start to build from here. Once investors see new lows in the 125 and higher level and new highs below 50, then investors know a correction is definitely underway. Instead the numbers we are looking at above are signs of a pullback in progress not a correction yet.
Market Direction Closings For July 31 2014
The S&P closed at 1930.67 down 39.40 and sitting at the 1930 support level. The Dow closed at 16,563.30 down 317.06 and well below 17,000 closing at the lows for the day. The NASDAQ closed at 4369.77 down 93.13 for the largest decline among the three main indexes of 2.09 percent.
The Russell 2000 IWM ETF closed down 2.28% for a loss of $2.60 to close at $111.19. Yesterday I wrote that the small gains over the past two days in the Russell 2000 may be a sign of more strength than we realize within the small caps. Today’s numbers tell us that the weakness which exists could over the next few days push the S&P below $108.00 which would signal a full correction underway.
Market Direction Technical Indicators At The Close of July 31 2014
Let’s review the market direction technical indicators at the close of July 31 2014 on the S&P 500 and view the market direction outlook for August 1 2014.
Stock Chart Comments: I have been commenting for more than a week now regarding the past chart patterns of the various dips in the S&P over the past 3 months. I have marked these in the chart above as A, B and C. The period marked D is where stocks are at present. I have been explaining that the previous patterns are not being repeated at point D which indicated the market direction up is struggling. Today’s plunge confirms the pattern is finished and the trend has been changed.
1975 Support: There was a new support level in the recent ongoing rally and it is now ended.
1956 Support: This level had been tested in the past and was a significant support level for the present rally. I have been explaining repeatedly in the market direction comments for numerous days now that “A close back below 1956 would end the present rally and I would trade to the downside.”
The close today marks an end to the present rally. The trend is changed to down and I will be trading with the downside. This means rallies are suspect and if they are traded they are for very short trades of no longer than an hour to no more than a day. All rallies have to be studied for opportunities to trade lower. The only thing that can change this outlook is for stocks to push back tomorrow and close at or above 1956. I find this doubtful.
Support levels at 1930 and 1919 are both light support and would most likely just delay a strong pullback by a day at most. The market today closed right at 1930. As this is a support level I would expect a bounce, even a small one in the morning, before the market continues lower. The next stop should be at 1919.
Strong Support Levels are at 1870 and 1840. The 1870 level is below the 100 day EMA so I am expecting this pullback to reach that far. 1840 is below the 200 day EMA and would mark a serious correction. A break of 1870 is a definite signal that those investors not holding Ultra short ETFs or SPY PUT Options 2 months out, should be doing so by this point for a bigger move lower.
The other two support levels not shown in the chart above are 1775 and 1750. I have explained that these two are critical support for the present bull market. While 1775 is important it is 1750 that is now the bottom line.
A break of 1750 would mark a severe correction of 180 points which is below a 10% correction from the most recent high. This would be the biggest correction since April 2012. A pull-back of that size would definitely stun investors at this point and it is not something I am anticipating as there are no signs of any impending correction of that magnitude. If stocks did get this low it would become questionable if the correction would move down at least another 5%. This has to be assessed as the present pullback gets underway.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. I still believe there are too many signs against a bear market or a severe correction beyond 10%.
Instead what we might see is additional weakness and higher volatility. That too would assist in driving up option premiums. At present the signs are showing that the present rally is at an end and the market is moving lower.
A break of 1930 would mark a new lower low in the market and wipe out the previous patterns which I show in the above chart as Alb And C.
A move below 1919 would set up another lower low and most likely send stocks to 1870 which was the original outlook for my pullback.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is now negative. Momentum continued to move lower into deeper negative readings today.
MACD Histogram: For MACD Histogram, I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9. MACD (Moving Averages Convergence / Divergence) issued sell signal on July 8 and the sell signal is still active and now has widened. It continues to now signal that stocks are heading lower.
Ultimate Oscillator: The Ultimate Oscillator settings are: Period 1 is 5, Period 2 is 10, Period 3 is 15, Factor 1 is 4, Factor 2 is 2 and Factor 3 is 1. These are not the default settings but are the settings I use with the S&P 500 chart set for 1 to 3 months. The Ultimate Oscillator fell into oversold readings today.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change is now solidly negative and the reading is indicating a new change in trend is underway.
Slow Stochastic: For the Slow Stochastic I use the K period of 14 and D period of 3. As the Slow Stochastic tries to predict the market direction further out than just one day. The Slow Stochastic has been issuing down signals since Friday. Today’s sell signal is strong which would indicate that stocks will be lower at the start of next week.
Fast Stochastic: For the Fast Stochastic I use the K period of 20 and D period of 5. These are not default settings but settings I set for the 1 to 3 month S&P 500 chart when it is set for daily. The Fast Stochastic at the close is deeply oversold and with a k% reading of 0.00 it is ready for a bounce.
Market Direction Outlook And Strategy for August 1 2014
I had little time to write articles during the day today. I did a lot of trades and wrote a large number of emails to assist members with suggestions and ideas to both profit from the move lower today and to protect positions, many of which were caught in the money. For those investors trading in small caps and more speculative trades, many of their stocks took a large beating. For those investors trading in large cap stocks, there was less damage in general and some exceptional trade opportunities to profit from the downturn and to profit when adjusting positions to protect trades caught in the money.
As explained yesterday, I closed some further out of the money naked puts that have good profits but can be closed for 50% or better profits. Today I did a number of trades which I will update shortly and I rolled a number of positions both forward and some lower and further out in time.
I am writing a series of articles in the members section on strategies for a pullback. They will be posted throughout the day on Friday as I look at a number of strategies and various stocks from investors who have emailed me.
With the market direction now down, I will be trading more to the downside. My first trade today was in the SPY Put options as discussed above. I will be doing more of these spy put trades during upcoming days.
The market direction at present is deeply oversold. The selling today brought in fresh volume so obviously investors were starting to panic. The VIX Index closed at $16.95 up 27.16%. My VIX Index strategy trades doubled in value today. I am writing an article this evening on that strategy as well to explain what I am doing with the strategy at present. This has to be one of the best VIX Index strategy trades this year.
For Friday I am expecting the market direction to bounce off the deeply oversold technical readings and the 1930 technical support level. 1930 though is very light support and I am anticipating that a rebound rally will allow me to pick up more spy put options for trading lower as any rebound rally at this point will fail and the market direction will move lower through 1930. Too many technical indicators and support levels have been broken in today’s pullback and this type of pullback which is the biggest since April for the S&P and February for the Dow places both indexes down to within easy reach of the 100 day EMA. The NASDAQ index closed at the 50 day SMA. The Russell 2000 is below the 200 day EMA and within easy reach of the $108 level which would signal a strong correction for the Russell 2000.
These are all important signals that advise to be careful here. I will be trading to the downside, watching the amount of capital being used and set up strategies that focus on protection of capital first and profit second. For Friday the market direction outlook is for a rebound and then further selling. I should be able to pick up spy put options on Friday. The rest of my investing strategy notes will be in the members section during the day on Friday.
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