The market direction outlook for Thursday was for stocks to try again for a rebound and then sell lower. The rebound was almost non-existent at the open and downhill from there. While in general earnings have been strong investors are now focused on interest rates concerns and in particular the geopolitical problems. Russian sanctions are bound to hurt Europe which also means lower European economic performance and with so many EU nations already facing either slow GDP growth or recession, the sanctions come at a poor time. Meanwhile Putin seems intent on either invading Ukraine or assisting rebel forces further as the sanctions continue to not have any effect on his decision-making process. During the day today a rumor circulated that the US was planning airstrikes in Iraq which also unnerved investors. This evening those rumors turned out to be true as President Obama addressed the nation. In general then the focus has turned to the “issues” of the day and this is having a negative effect on stocks.
Let’s take a look at today’s action.
Market Direction S&P Intraday Chart August 7 2014
The one minute intraday chart for the SPX for August 7 show the rally attempt which lasted about an hour in the morning with little success as stocks initially jumped to 1928.99 but then failed to move higher. Much of the time stocks were struggling just to hold the 1925 level. From there stocks fell pausing in the late morning around the 1920 level before falling again down to the 1910 level by mid-lunch hour. This represented a pullback of 18 points. With the SPX oversold by mid-lunch hour a rally should have been expected. A rally did commence but the same pattern you can see below emerged. Each rally failed to recover previous highs. These failures are all warning signals that the market will be moving lower. It is actually simple to understand. Buyers can see the building pressure as more and more investors decide they want out. The buyers then move lower and wait for sellers to meet them. When sellers do move lower buyers pick up shares and then start to pressure stocks back to the upside, but these are primarily day trades and the buyers start unload for small gains as the index climbs back to the previous high. As stock buying slows and then falls, sellers panic a bit and start to chase buyers lower again, pushing stocks back down. The pattern then repeats itself.
When buyers believe the market direction sell-off is bottoming they will step in with bigger size buy orders and more capital. This will create the next big rally, but until then, stocks are stuck and today stocks closed below the 100 day exponential moving average (EMA) which means buyers will most likely move lower again and the pattern above will repeat itself until eventually either sellers stop selling or buyers decide the market will probably not move much lower and they will step back in as explained above and buy bigger quantities and pressure stocks to rise again.
Advance Declines For August 7 2014
There is no panic selling happening in this downturn. Even the VIX Index was up just 29 cents at the end of the day. Volume was lower than yesterday’s 3.5 billion shares with 3.2 billion traded today.
69% of that volume was being traded to the downside but actual declining issues were 52% with advancing issues at 45%. New lows are steady but not rising. Today 60 new lows were recorded but there were 37 new highs which is a jump from yesterday’s 27.
Market Direction Closings For August 7 2014
The S&P closed at 1909.57 down 10.67. The Dow closed at 16,368.27 down 75.07. The NASDAQ closed at 4334.97 down 20.08.
The Russell 2000 IWM ETF gave back the latest rises and moved lower by 54 cents to close at $111.19.
Market Direction Technical Indicators At The Close of August 7 2014
Let’s review the market direction technical indicators at the close of August 7 2014 on the S&P 500 and view the market direction outlook for August 8 2014.
Stock Chart Comments: The most important aspect of today’s chart is the break of the 100 day EMA and close below it.
1975, 1956, 1930 Support: These three support levels have been broken and will now act as resistance.
1919 Support: This level broke again today and may possibly be recovered on Friday but seems unlikely.
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 but a lot now depends on how strong the recovery bounce may be. 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%.
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%.
At this point the 1919 level has been severely tested and broke today. It may not be recovered tomorrow.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is negative and pushing lower.
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. Today the sell signal continued to gain strength.
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 now deeply oversold and keeps signaling a bounce is coming.
Rate of Change: Rate Of Change is set for a 21 period. Today’s the Rate Of Change remained sideways and negative. It needs to fall deeper to signal a change back to up, or move up from here back to positive. Trending sideways as it is presently is signaling that the market will remain weak with sellers dominating.
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 pointed to up for the past two days. Today it changed to down and remains extremely oversold.
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 pointing to stocks moving lower. It has remained extremely oversold but this has not had the effect of assisting a rebound rally.
Market Direction Outlook And Strategy for August 8 2014
You can be sure that if I change my outlook to lower with no rebound rally, the market will rebound.
The problem stocks are facing is the continuing geopolitical turmoil, especially Ukraine. Throw in all the other issues of everything from EU economic slowdown, Gaza, Iraq rumors of airstrikes, the Weekly Initial Unemployment Insurance Claims coming in strong which scares investors into the belief interest rates will rise possibly even this year and of course let’s not forget the end of Quantitative Easing in October after 5 years and you can see why stocks are in trouble.
The oversold indications from the various technical indicators almost always point to a rebound rally of some kind. Instead stocks are getting these little rallies and then more selling but there is no panic here, just more sellers than buyers. Buyers slip lower, and sellers follow.
Keeping tight stops on positions is becoming an important part of my trading now. The Trading For Pennies Strategy are highly profitable here as I keep trading them to the downside. The SPY Put trades have grown significantly in value which I will post this evening to the USA members section. The Ultra ETFs are all being traded to the downside and have been for several days now.
Tight stops continue to generate significant returns while working to protect against a rebound rally that I have been expecting, but not seen happen aside from small morning rallies that fail.
For Friday a rebound rally is always possible, but when the market tanked on Tuesday it technically hurt the market and there has been no recovery rally. For tomorrow the pattern is the same as I trade with the downside and keep a close eye on my positions and close any that appear to be possibly in trouble.
The outlook for stocks is for the 1900 level to break and stocks to push lower but I will not be surprised to see a rebound finally happen off the 1900 level. If however Russia should invade Ukraine, stocks will plunge. I have mentioned before that 1919 was critical for this market. If 1919 is not recovered on Friday, 1870 will be the next stop.
With President Obama approving airstrikes in Iraq this could be yet another negative catalyst for Friday.
Overall then for Friday stocks are positioned to fall lower. As explained we could see another rally attempt in the morning but unless volume improves it will fail as investors are far too nervous now to be buying stocks for anything more than a trade or two. Market direction looks ready to move still lower.
Stay FullyInformed With Email Updates
Market Direction Internal Links
Profiting From Understanding Market Direction (Articles Index)
Understanding Short-Term Signals
Market Direction Portfolio Trades (Members)