The market direction outlook for Wednesday was for stocks to remain weak and try to move slightly higher. In the end though, investors were looking for a reason to take profits with the market direction up so heavily overbought. The World Bank indicated plans to cut its 2014 global growth forecast from 3.2 percent to 2.8 percent. That was enough for investors who have wanted to take profits for the past several days. Meanwhile recent data shows that hiring in the US is strengthening while Chinese exports continue to increase including the latest May exports. While the World Bank may think global growth forecast needs to be downgraded rarely have they been accurate in their predictions for global growth. Certainly it is difficult to determine world-wide growth when so many factors come into play, but for investors, it was an excuse to finally take profits.
Market Direction S&P Intraday Chart June 11 2014
The intraday 1 minute chart for June 11 shows a choppy morning but no panic at all during the day. The morning opened with a quick drop and then two small rally attempts. By 10:30 the market had reach 1942 which held all afternoon until shortly before 2:00 PM when more selling arrived. I wrote in my intraday comments that if the market closed above 1942 then it was simply a profit taking day. The afternoon pushed down to 1940.08 and then buyers moved back in buying the dip and pushing the SPX back to 1943.89 at the close which placed it above 1942. A lot of the analysts on CNBC and many blogs moaned about investors still buying the dips even with the market sitting at record highs. They complained that eventually this will be the wrong move and indeed eventually it will be, but for a bull market this is the right move as dips are buying opportunities or in my case selling naked put opportunities.
Advance Declines For June 11 2014
The down action today was interesting when we look at the 52 week highs and lows. Despite the selling, there were only 8 new lows. This points to how confident investors are that stocks are moving higher. New highs came in at 104. 60% of stocks were declining and 37% advancing. Volume today was again just 2.7 billion. That number is low for a sell-off day.
Market Direction Closings For June 11 2014
The S&P closed at 1943.89 down just 6.90. The Dow closed at 16,843.88 down 102.04. The NASDAQ closed at 4331.93 down just 6.06.
The Russell 2000 was down just 57 cents to close at $116.10. All the numbers today show simply weakness and not much else at this stage.
Market Direction Technical Indicators At The Close of June 11 2014
Let’s review the market direction technical indicators at the close of June 11 2014 on the S&P 500 and view the market direction outlook for June 12 2014.
Despite today’s bit of selling there is no change to report except that the SPX still closed above the 1942 level. The selling today was simply a reaction to the overbought condition in the market direction up combined with the World Bank forecast which gave investors an excuse to take some profits. None of the numbers from the stock movements today point to anything other than normal weakness in a very overbought market.
I keep mentioning the same 4 key support levels, night after night but it is important to understand how to invest based on those support levels. So I will keep the same information in this section until there is a change. With the market continuing to break into new all-time highs, there are now four key support levels in the market. Long-term support is at 1750. If that level should break at this point, it would mean a significant correction would ensue. The second level of support is at 1775 which again is good support and if it broke would mean that the market direction would quickly collapse down to 1750. These two indicators are good values to use for longer-term trading. As long as stocks stay above these levels, there is no concern the markets will experience any kind of severe pullback. The 1775 and 1750 levels are both now below the 200 day exponential moving average (EMA).
The next two levels are at 1840 and 1870. At this point with the S&P above 1900, any pull back to 1870 would be a signal to pick up short instruments like the SDOW or SQQQ ETFs or spy put options. If 1870 were breached it would mean a further break lower to at least the 1840 level and for investors it would be a quick and easy trade to pick up short products to enjoy some profits down to 1840. If 1840 were to break at this point it would mean to roll any at the money puts lower and roll down covered calls but only if 1840 were to break. Between 1840 and 1775 there is very little to no support.
My outlook for a pull-back is unchanged. I still expect to see the market test to find support at some point over the summer months and with no support in place except at 1870, I believe the market may try to build support at 1919 or between 1919 and 1870.Unless the market can break through 1870 I see no reason to curtail my trading activity.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past five months, replacing MACD as the most accurate indicator. Momentum is positive and strong.
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 buy signal on May 23. The MACD signal continues to point to higher valuations in the S&P although the signal moved lower again today.
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 continuing positive and remains extremely overbought.
Rate Of Change is set for a 21 period. The rate of change remains positive and is still supporting the recent break out of the S&P above 1900. Today it turned slightly down which is natural considering it was a down day.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling market direction down and it is extremely overbought. The differences between the two signals (K and D) are slight which points to more sideways than much of a down move for stocks.
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 signaling that the market direction is down and it too is extremely overbought. The divergence between the two signals (K and D) is wider than yesterday and could be pointing to a bit more pullback on Thursday than we saw today.
Market Direction Outlook And Strategy for June 12 2014
The market direction technical indicators are still 4 to 2 that stocks will continue their advance. There has been no change in my trading. I am continuing to trade but staying far enough out to assist in the event that stocks pull back somewhat. I am not expecting a major correction. There are no signals that a major correction is about to occur. Instead I am looking for the market direction to pull back to consolidate recent gains and prepare to push higher.
Today’s move lower was predicted by the two stochastic indicators. They continue to point to additional weakness for tomorrow. The Fast Stochastic has a wider divergence today so we could see a bit more selling on Thursday.
Thursday is also the Weekly Initial Unemployment Insurance Claims so we could see a bit of movement either way depending on what the numbers look like. At present though investors seem very confident that the direction higher will hold. Looking at the chart above you can see that the S&P is far above the 50 day moving average which certainly happens from time to time but never stays that way. At some point the market will consolidate and test to find support levels.
The technical signals in general are showing signs of weakness, but the push higher has been overwhelming so weakness at this stage is certainly to be expected. Overall I look at the present weakness as opportunity to find more trades and that is what I will be doing on Thursday.
For tomorrow then weakness seems to be the market direction outlook.
Two Stocks to mention this evening are Caterpillar Stock and Lululemon Stock
Caterpillar Stock
Tomorrow I will be concluding the latest trade on Caterpillar Stock when I sell the shares I bought in the last dip. I have used a combination of two strategies to assist in profiting from Caterpillar stock this year. The first is the Home on the Range Strategy which members can review here. The second strategy being used in the Bollinger Bands Strategy Trade. By combining the two the results have remained impressive with no stock assignment. The stock has been in a strong uptrend. The red arrows in the chart point to the Middle Bollinger Band. You can see how often the Middle Bollinger Band has held the stock up as it continues to rise. This makes naked Put Selling or credit put spreads easy. I have listed below the put strikes I have sold in each of the three ranges this year. Meanwhile every time the stock has dipped below the Middle Bollinger Band I have waited to see if it will reach the Lower Bollinger Band and then bought stock. Twice this year Caterpillar stock has reached the Lower Bollinger Band. A stock in an uptrend like this is easy for Put Selling. At present the stock is pulling back from the Upper Bollinger Band which is my signal to sell my shares. I will be waiting to see if it pulls back to the Middle Bollinger Band again and then sell another round of naked puts. Today Caterpillar increased its dividend by 17 percent.
Lululemon Stock
A stock I mentioned yesterday on the FullyInformed Canada site, but which trades exclusively on the NASDAQ is Lululemon Athletica Stock. It is a Canadian company from Vancouver, British Columbia. Despite this many US investors also trade in this company. Last year I was doing Put Selling before the stock commenced its collapse. At present the stock is sitting at lows not seen since 2011. For some investors that seems to indicate that the stock is a great buy. I received a lot of emails over the past few days as Lulu stock presents earnings on June 12. To repeat what I said on the FullyInformed Canada site, this is not a stock for naked puts in my opinion or naked calls or even credit call spreads. I believe the only way to trade is with credit put spreads. Put premiums are excellent but as many investors know from the past trades in Lulu stock, those high premiums can draw investors into losing trades if the stock continues to fall. At present it is estimated that 25% of the entire float has been shorted on this stock. Price to earning has pulled back to 23.8 times which is fair for this industry and possibly even a bit too low. LULU has one of the highest ROEs of all companies in the Retail Industry with a profit margin of 17.57%. For those interested in credit put spreads, select a level you would be happy to be assigned shares at. A 10% correction would put the stock down to around $40. Below $40 there are still some very good put premiums available and a credit put spread could easily be created through perhaps selling the June 27 $39.50 for .70 cents and buying the $36 for .25 cents. This makes for a 50 cents return on $3.50 of risk for a 14% return. However you have to realize that risk is always in every trade. The stock could easily fall below $39.50 but stay above $36 leaving an investor with a losing trade and possibly at risk of assignment. There is also the present turmoil within the company itself to consider. With the founder of Lululemon Athletica and biggest shareholder, Chip Wilson comments against the company’s board and voting against the new chairman, there is perhaps enough uncertainty which could easily push share valuation lower still.
Still though the trade does seem compelling. In cases like this I ask myself what other trade could I enter that could earn the same amount and have less risk. This is how I can determine whether a trade is worthwhile to consider. I have not traded Lulu stock since the collapse last fall. I have no interest at present to trade in it but I understand the attraction. Just remember to consider the risks and look at the chart pattern when placing trades against a stock like Lulu.
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