The market direction outlook for Friday was for stocks to head lower. I indicated that stocks could move sideways but that technical damage had been done by the selling on Thursday which could last more than a day or two. I had explained that an event like the Ukrainian downed airliner along with the invasion of Gaza by Israel could the catalyst that pushed stocks lower.
None of that happened. Instead Russian President Putin called for a ceasefire while the downed airliner event is investigated and US President Obama spoke of bringing those responsible to justice. In other words, so far there has been no escalation of the Ukrainian fighting. This and good earnings from Google pushed stocks back up. So will Friday’s rally hold despite the technical damage done on Thursday?
Market Direction S&P Intraday Chart July 17 to 18 2014
The 5 minute chart below shows Thursday and Friday’s action. Thursday saw the market sell-off to 1970 and then break through 1970 and finally collapse back to light support at 1956. On Friday the market closed just above 1956, adding strength to the 1956 support level in the S&P. Normally a bounce that can trap investors into thinking the market has more room to rise before falling again, would take the S&P up to 1970 and then trend along that line. In my mid-afternoon comments on Friday I indicated that if the market closed around the 1960 level, that would be bearish for the next move. If it closed above 1972 it would be bullish. This is because, as you see in the 5 minute chart below, 1970 is the pivotal valuation for the pullback on Thursday. I had expected further weakness on Friday. When the market pushed up within the first few minutes I waited and then bought the SDOW which is the DOW30 ultra-short three times ETF. This was a mistake. I took a loss and sold out as the S&P reached 1970 and held above it. Note in the chart below that when the S&P reached 1970 stocks never fell back below it. That was my signal to take the loss, get out of the SDOW and buy the UDOW which is the DOW30 Ultra-pro (UP) three times ETF. I was also doing SPY Put options which worked for the first two trades but failed on the third trade as by the time I placed the third trade the S&P was already holding the 1970 level and trying to push higher.
From the 1970 level Stocks pushed to the 1980 and slightly broke through in the last hour of trading on Friday. The S&P then closed at 1978.22. A normal bounce before more selling erupted would have taken the S&P back to just below 1970 which would have then acted as resistance. This did not happen and investors looked upon the Thursday sell-off as an opportunity to buy some stocks cheaper than they had been on Wednesday.
SPX 5 minute chart for July 17 and 18 2014
For FullyInformed USA Members, you can review the market direction medium term outlook through this link. There are updates to the trend as of July 18.
Advance Declines For July 18 2014
In Thursday’s sell-off volume was not overly high with 3.4 billion shares traded. Friday’s rally was on still lighter volume with just 3.1 billion shares traded. Normally the initial day of a rally back that is a true buying opportunity from a one day drop has slightly less volume than the sell-off. The second and/or third day normally has higher volume. That means on Monday we should see more volume than the 3.1 billion shares traded. If not, then stocks normally will fall back.
Volume remained fairly light today at around 3.4 billion shares, the same volume as Wednesday. 79% of stocks were declining and 83% of the volume today was to the downside. There were 103 new highs and 21 new lows on Friday. 77% of shares traded were higher and 80% of stocks were moving higher. These are bigger numbers than normally seen in a bounce back then it usually a trap for investors. The numbers of Friday were more bullish for further upside, but volume on Monday should be better than Friday to assist in confirming a continuation of the rally.
Market Direction Closings For July 18 2014
The S&P closed at 1978.22 up 20.10 but still below Thursday’s drop of 23.45 points. The close on Friday though was better than 50% which almost always indicate the trend is intact. The Dow closed at 17100.18 up 123.37 but still below Thursday’s drop of 161.39 points. The Dow though did close again above 17000. If you recall, the Dow has since the collapse of stocks back in 2008 to 2009, had trouble breaking through large round numbers like 15000, 16000 and 17000. While these are just numbers, that pattern of up and down at these big round numbers shows that the majority of investors consider these numbers significant and are using them to readjust portfolio which includes taking profits and setting up new trades on dips at these large numbers. It is certainly interesting to watch that pattern unfold each time the Dow reaches a new big round number.
The NASDAQ closed at 4432.15 up 68.70 points which recovered all of Thursday’s loss of 62.52 points.
The Russell 2000 IWM ETF closed at $114.23 rising $1.75 and recovering all of what was lost on Thursday.
Market Direction Technical Indicators At The Close of July 18 2014
Let’s review the market direction technical indicators at the close of July 18 2014 on the S&P 500 and view the market direction outlook for July 21 2014.
Stock Chart Comments: If you look at the chart above you can see the levels marked A, B, C and D. I have been explaining for several days the importance of the market in maintaining a similar pattern this time.
You can see in the chart that the pattern has been broken. Thursday’s decline set up a new pattern and Friday’s recovery has yet to confirm that the pattern is still back to up. There must be follow through to the pattern to the upside. Friday’s rally recovered a lot of what was lost but not all.
1956 Support Level was tested on Thursday and held the market up again. This is yet another test of the 1956 level and I have now changed it to full support. This becomes the most significant support level at present for the ongoing rally. This is not a significant support level for the bull market in general but it is for the market being able to continue higher into August.
Support levels at present are 1956 which is medium support and pivotal to the market direction continuing higher. 1930 and 1919 are both light support and would most likely just delay a strong pullback by a day at most. 1870 and 1840 are strong support. 1870 and 1840 at present mark important trading levels for investors. Both are now below the 100 day exponential moving average (EMA) so any pullback this summer which breaks 1870 should be used as a signal to commence picking up ultra short ETFs or spy put options 2 months out for a bigger move lower. A break below 1840 at present would challenge the 200 day EMA.
I have repeatedly mentioned two other support levels, namely 1775 and 1750. As the market continues to push higher, these are now absolutely critical support levels. 1775 is important but 1750 is now the bottom line. A break of 1750 would mark a severe correction of 230 points which is below a 10% correction which 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. Friday’s rise in the market recovered almost all the drop from Thursday. Whether this is the start of a pullback I have looked for, is still hard to judge. There are so many analysts expecting a pullback that if this is the pullback for the summer, there will be a lot of analysts claiming “they called it first”. We will need a day or two to determine if this is the start of the long anticipated pullback but Friday indicated that investors felt Thursday’s drop was a buying opportunity. That sentiment could change overnight.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum failed to turn positive on Friday and continued to remain slightly negative.
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 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 back to positive.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change which was neutral on Thursday turned back up and is positive after a bounce today.
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, it has remained with a down signal despite Friday’s advance. It will need another un day to turn back to up. Right now it is indicating we will see lower prices to start the 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 is showing an up signal at the close on Friday.
Market Direction Outlook And Strategy for July 21 2014
Monday will probably be the day to decide whether Thursday’s drop was just a one day pullback. Normally a day like Thursday will result in further weakness but the bounce back on Friday recovered almost everything that was lost on Thursday. Still though a number of the technical indicators were unimpressed by Friday’s recovery and will need to see further upside to start the week, to support the rally continuing higher.
The cautionary stance is worth continuing. The market direction has been struggling although it has stayed above the critical 1956 level. Many investors took Thursday’s close which was just above 1956 as a signal that the next move is back to up. I am not convinced.
Monday will probably see some weakness but the key to watch will be the 1970 level. As long as the S&P closes above 1970 the damage from Thursday’s decline is probably minimal at most. If though the S&P closes around the 1960 level, look for stocks to remain weak and another test of 1956 could be in the works.
I am continuing to take smaller positions on and looking for trade opportunities in my watch list of stocks that meet protective strategies first and profit second. That means
- selling slightly in the money covered calls rather than out of the money covered calls
- selling put strikes at prices I would accept shares at
- rolling down naked puts caught in the money as soon as the underlying strike reaches my strike point
- selecting only strong stocks for the Bollinger Bands Strategy Trade
- reducing the size of all positions taken
- keeping more than the usual amount of capital on the sidelines
By following the above 6 rules I have no concern continuing to trade and aim for profits at the present level. It would however be good to see Monday’s market direction move close above 1980. Overall the market direction outlook for Monday is for weakness following Friday’s recovery but a positive close is important to keep stocks on a trend higher. Monday then is yet another pivotal day in market direction for the ongoing bull market. I personally think the market direction will trend sideways and have a lower close but above 1970 while the technical indicators are mixed with a bias to a slightly positive close on Monday. It will be interesting to see who’s opinion is right.
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