The market direction outlook for Monday was for stocks to head higher and indeed stocks put on quite the show with another huge gain, the second such large gain since Friday Aug 8. The reasons were varied including better than expecting housing, the upcoming Fed meeting at Jackson Hole, the present decline in hostilities in Ukraine and the break of the 50 day simple moving average (SMA) on Friday before markets tanked. The push back on Friday afternoon set the stage for today’s rally higher. Let’s take a look.
Market Direction SPX Intraday Chart August 18 2014
The rally today started right at the open as you can see in the 1 minute chart of the SPX today. The opening gap up took the market right to the key support level of 1956. This should have acted as more resistance which it did on Friday. Today though it broke within half an hour as soon as the housing report was released. From there stocks rallied hard to 1972 by the lunch hour. For the remainder of the afternoon stocks drifted down to the 1970 level but in the last half hour stocks rallied again to close back at the morning higher at 1971.74.
Advance Declines For August 18 2014
Volume today was poor with just 2.6 billion shares traded, one of the lowest days for trading in weeks. 81% of that volume was pushing higher. 76% of all stocks were advancing but more important, there were 147 new highs and just 20 new lows. The bulls once again remained in charge which bodes well for further advances on Tuesday.
Market Direction Closings For August 18 2014
The S&P closed at 1971.74 up 16.68. The Dow closed at 16,838.74 up 175.83. The NASDAQ closed at 4508.31 up 43.39. The NASDAQ set a new 52 week record and the highest level in more than 10 years.
The Russell 2000 IWM ETF rose $1.65 for a 1.46% gain to close at 115.04. The Russell 2000 is now just below the 50 day simple moving average (SMA).
Market Direction Technical Indicators At The Close of August 18 2014
Let’s review the market direction technical indicators at the close of August 18 2014 on the S&P 500 and view the market direction outlook for August 19 2014.
Stock Chart Comments: The most important aspect of today’s chart is the recovery back above 1956 and above the 50 day simple moving average (SMA). Now the market needs to move above 1975 and it will then challenge the previous all-time high.
1975, 1956 Support: 1956 is now back as support. It may be tested again but for now it is support. 1975 is ready to be challenged and the market looks strong enough to break through although probably on light volume.
Strong Support Levels are at 1870 and 1840. At present I am not expecting any break of either of these levels.
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 more than 10% 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.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. That outlook is now finished.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is positive.
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 buy signal on Friday August 15. That buy signal was strongly confirmed today.
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 is still overbought. It can remain overbought for some time although we may see some weakness creep in tomorrow morning.
Rate of Change: Rate Of Change is set for a 21 period. Today the Rate Of Change failed to turn positive today despite the huge rally higher. It is though almost neutral so any further upside should push the Rate Of Change higher.
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 is signaling market direction is up.
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 is also signaling up for stocks.
Market Direction Outlook And Strategy for August 19 2014
The technical indicators remain quite clear that the market direction is for stocks to move higher on Tuesday. The strength of today’s rally has pushed the market into overbought conditions but not severely so. This means there is room to the upside yet for stocks. A break of 1975 would be incredibly bullish for stocks to challenge again the all-time high. If at this stage the market was to turn back down, that would be quite bearish for September. There are no signs that this will happen. Instead the technical signs for short-term are that stocks are headed higher.
Any change in the fighting the Ukraine could result in another pullback of stocks, especially if Russia becomes more involved. At present Putin has given indications that Russia is out of the picture, but I doubt that. If there was a Russian column destroyed he will retaliate at some point and I would expect it to be sooner rather than later.
I am continuing to sell puts and look for trade opportunities and was filled on a number of the stocks in my 10 trades I wrote about this evening. For Canadian stocks the best trade today was in Bank Of Montreal.
For tomorrow the market direction is still higher for stocks although I think we will see some weakness creep into stocks. I am not expecting as big a rally as today.
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