The market direction comments on Thursday indicated that the rally was terrific to see happening on Thursday but it had no technical strength and basically pointed to a bounce and not much more. Friday’s market collapse which once again placed the market back into correction territory, was strongly negative and is now giving readings as strong as we saw on August 24 and August 25. Let’s see what the technical indicators showed Friday at the close to see how stocks could start off Tuesday.
Index Closing Prices
All the indexes closed off their lows on Friday but only slightly. The S&P closed at 1,880.33 down 41.51. The Dow Jones closed at 15,988.08 down 390.97 and back below 16000. The NASDAQ closed at 4488.42 down 126.59 and below 4500.
Advance Decline Numbers
Volume on Friday came in at 5.48 billion with 4.85 billion of all that volume moving to the downside. That is 88.5% which surprisingly is not as bad as it was in the August bottom. Still at 88% it is still pretty bad. There were 938 new lows on Friday which is the highest number of new low since August 24. New highs were 7.
Market Direction Technical Indicators At The Close
SPX Market Direction Technical Analysis for Jan 15 2016
Stock Chart Comments:
The S&P fell outside the Lower Bollinger Band intraday on Friday when it punched down to 1857.83 but closed back inside the Lower Bollinger Band and above the important 1870 level. 1870 as explained below is strong support for the market. Although the candlestick on Friday was back inside the Lower Bollinger Band it is still showing a pattern of lower highs and lower lows.
The 50 day moving average is slipping below the 200 day on Friday which is another sell signal.
The Upper Bollinger Band is flattening out and turning down which again indicates further weakness is ahead for stocks. Lastly, the closing candlestick on Friday is bearish and is accurate about 60% of the time.
Support and Resistance Levels:
These are the present support and resistance levels. These levels have not changed since January 2015. 2100 was light support. Stocks have been unable to stay above this level. It remains resistance.
2075 was light support and is also resistance. Below that is 2050 which was also light support and now resistance.
Stronger support was at 2000 which is now resistance.
Weak resistance is at 1970 while stronger resistance is at 1956 and technically it is more important than 1970 for the market. 1940 was light support and is now resistance. 1920 was light support and is also resistance. 1900 is more symbolic than anything else.
1870 and 1840 are both levels with strong enough support to delay the market falling and should see a sideways action attempt while investors decide whether to sell or buy. So far 1870 has held the market up better than any of the other support levels aside from 2000 which held the market up for months before the collapse in August 2015. 1870 was my original goal for the January correction back in December. I am no longer sure the market can hold 1870.
The other two support levels 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 the bottom line.
A break of 1750 would mark a severe correction from the all-time high of 2134.72. This would be the biggest correction since 2011 plunge of 271 points for a 20% pullback. A pullback to 1750 from the all-time high would be a drop of 384 points for a decline of 18%. A pull-back of that size would definitely stun investors and bring to question whether the bull market is finished.
Momentum: For momentum I use a 10 period when studying market direction. Momentum on Friday is strongly negative and moving 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 a sell signal on Jan 4. The sell signal is strongly negative on Friday.
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 negative but did not fall back on Friday despite the heavy selling. It was trying to rise on Friday, mainly being caused by investors trying to hold the 1870 level for stocks and managing to close at the 1880 level.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change signal is negative and falling however the reading of negative 7.98 is in the area where a strong bounce often happens.
Slow Stochastic: For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic tries to predict the market direction further out than just one day. The Slow Stochastic is back pointing lower and is deeply 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 lower for stocks at the close and it also deeply oversold.
Market Direction Outlook for Jan 19 2016
The sell-off on Friday has once again created a strong oversold condition in the market. Many technical readings are also strongly negative which is often a signal that a bounce could be expected. All indicators are however still strongly negative and while that often means a spike higher is at hand, in a strong downturn it can take more than a day for that spike higher to occur.
For Tuesday I won’t be surprised to see a gap down at the open which will break the 1870 level and then for stocks to try to recover the 1870 to 1880 level again before selling lower. Even if there is a bounce back on Tuesday and stocks actually close positive, the move lower is well entrenched and technical indicators look like more downside is to come before a rally can occur. For Tuesday I am expecting a weak day in general and a still lower close to once again test the bulls’ strength at 1870. There is a good chance stocks will close below or near 1870 on Tuesday. I’ll be updating the Market Direction Outlook throughout the day on Tuesday. Despite the weakness and lower outlook however, a possible spike up in oil on Tuesday, especially above $30 a barrel should have some positive impact and may delay a move below 1870.
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