The market direction outlook for Tuesday was for stocks to continue their advance despite some pressure being brought to bear from profit taking. One of the more interesting figures today came from durable goods orders which jumped 22.6 percent. However when you strip out orders to aircraft company Boeing, durable goods orders actually declined 0.8 percent. While not too many investors took note of this and while it could be a one-time occurrence it does bear watching. Let’s look at the SPX intraday in the one minute chart to see the action today and the profit-taking.
SPX Market Direction Intraday One Minute Chart
The morning opened with a small but sharp bounce and then a run up to just above 2002. This was followed by a drop back to 2000 which was tested twice in the early morning. From there the market pushed up 5 points to set another new all-time high and then the rest of the afternoon was all profit-taking. New highs tend to bring out sellers and as explained before, while the 2000 valuation is not important technically it is important emotionally for a lot of investors. At new highs investors tend to take some profits. That is why yesterday I indicated in my abbreviated Market Direction outlook that Tuesday could see the SPX close at 2000 but Wednesday may see a more negative close. Let’s see if the technical indicators agree with my prognosis for Wednesday.
Market Direction Intraday for Aug 26 2014
Advance Declines For August 26 2014
Volume today continued to be low with just 2.4 billion shares traded. 64% of all volume was up with 34% down. 64% of all stocks were advancing and once again the bulls stayed well in charge with 163 new high and just 12 new lows. The numbers look strong and they are, but underneath there is a lot of profits being taken with investors unloaded shares.
Market Direction Closings For August 26 2014
The S&P closed at 2000.02 up 2.10. The Dow closed at 17,106.70 up 29.83. The NASDAQ closed at 4570.64 up 13.29.
The Russell 2000 IWM ETF rose $1.05 or 0.91% to close at $116.80 now solidly above the 50 day simple moving average (SMA).
Market Direction Technical Indicators At The Close of August 26 2014
Let’s review the market direction technical indicators at the close of August 26 2014 on the S&P 500 and view the market direction outlook for August 27 2014.
Market Direction Technical Analysis for Aug 26 2014
Stock Chart Comments: The most important aspect of the present market is the 1975 level. With the SPX now at 2000 there is bound to be profit-taking but as long as weakness does not penetrate 1975 the market direction remains solidly higher.
1975, 1956 Support: Both are light support and both may be tested in coming days but for the time being stocks look set to continue to move higher. 1975 is the more significant valuation at this point.
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 12.7% 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.
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 and climbing.
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. MACD continued to climb 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 heavily overbought which can continue at this level for some time yet before pulling back, however a pullback to reduce the overbought condition can happen at any time.
Rate of Change: Rate Of Change is set for a 21 period. Today the Rate Of Change pushed higher with a reading of 1.53. This indicates that in the profit-taking today new money was coming into stocks and buyers were interested in picking up shares despite the market being at 2000. Investor should be watching this indicator for any sign of a pullback. If Rate Of Change should move back down and head to neutral or negative stocks will most likely follow. Today’s move higher by the Rate Of Change indicator shows that in general investors are not overly concerned about the all-time high in the market and do not anticipate stocks will plunge any time soon.
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 down and it is overbought.
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 down to neutral for stocks and it too is overbought.
Market Direction Outlook And Strategy for August 27 2014
With the S&P now at 2000, profit-taking was bound to happen. Many investors are lightening up their positions and readying themselves for the next dip. Technically the up move still has strength although the overbought condition is wearing on the momentum indicators. Among the stronger indicators are MACD and Rate Of Change which both show there is more to the upside ahead.
The Slow Stochastic and Fast Stochastic are turning neutral to negative but the signals are very close between the %D and %K which indicates that at this point any weakness will be just that, weakness and not the start of another pullback.
The most important signal line at present remains 1975. While it is 25 points away, just a single day’s decline could get the SPX within striking distance of 1975 so it remains an important line technically for the present rally. As long as any weakness keeps above the 1975 line, I will be continuing to look for trades.
The weakness that is developing should open up some trade opportunities, which is exactly why many investors are taking profits as they want to raise cash for another push higher shortly.
If 1975 should break the market direction will change to down and we could be looking at something a bit stronger to the downside especially as we head into September and the fall period. Personally I have no crystal ball that can look that far out. Everything is truly just conjecture. I keep my Put Selling as close to the upcoming month as possible although I do have some puts now stretched into October and even a handful out to January, but those are puts I would accept shares on if assigned.
Otherwise for those investors who would rather not own shares but are continuing to engage in Put Selling as a principal investment method, I still recommend taking profits early and often and forget holding for that last 5 to 10 cents depending on what price the put option was sold for.
I currently see nothing that concerns me with the market direction but as we all know, catalysts can occur quickly and I still have my doubts with Putin in Ukraine. As the saying goes “things are quiet, perhaps too quiet”.
For Wednesday I am looking for another attempt to push above 2000 but continued profit taking to keep stocks under pressure. I do not think we will see much upside for Wednesday and a negative close even slightly, is definitely possible and perhaps probable looking at the stochastic indicators.
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