For Wednesday the Market Direction outlook was for stocks to attempt a second bounce and then sell and break through 1870. Instead every economic report released before the markets opened pointed to a global slowdown that might be creeping into the US economy. The decline in the price of oil as the US dollar has risen may be advising that there is more to the decline than just a rising dollar. If the world’s economies are slowing then the continual decline of oil prices may be a harbinger of that slowdown. Another theory being discussed is that the sanctions against Russia are actually pushing Europe into a deflationary recession. That too is hurting global growth. On top of all this the Ebola scare does not need any kind of introduction. Finally before the markets opened on Wednesday retails sales, the Empire State Index and the producer price index all came in below expectations and surprised most economists with how weak they were.
All of this contributed toward an opening plunge in stocks. This was obviously left over from the large give-back on Tuesday near the close of the day. Enough momentum to the downside had been building at the close on Tuesday that when coupled with the poor reports, investors decided to simply, “get out”. This created a record plunge.
SPX Market Direction Intraday 1 Minute Chart
The action for today is readily seen below. The SPX opened with a thud, falling all the way to support at 1840. This generated a quick rally but it failed to recover the 1870 support level and the selling intensified. Just as in previous days the selling produced more selling as investors were drawn into what was a panic type atmosphere. Shortly after the 1:00 PM the 1840 support level broke and the market collapsed. The Dow fell 450 points while the SPX hit 1,820.66.
But the intense selling drew in other investors who began to buy and by 2:30 the SPX had reclaimed the 1840 support level. This is strong support at this level and it will not break easily. For one thing it is below the 200 day EMA which many investors see as a prime buying opportunity. Buying continued and by the close the SPX had almost reclaimed the 1870 level. All in all it was an incredibly exciting day.
Market direction SPX intraday for Oct 15 2014
Advance Declines For Oct 15 2014
Wednesday was one of the highest volume days this year with more than 6.1 billion shares traded. New lows hit 594 which was the worst number of new lows for this year. New highs came in at 19.
Like yesterday much of the higher volume was from investors who are thinking that the bottom in the selling is close at hand. They could be right this time. The number of new lows is highly indicative of the panic seen in bear markets, not bull markets. Investors were truly scared especially by the lunch hour as well as the opening plunge which caught most investors and analysts by surprise. But this is not a bear market but a bull market. Not until 1750 is reached will the bull market be on “the ropes”. So despite the heavy volume with only 52% of shares were actually declining while 46% of shares were advancing. This could be a bottom in the selling even if just temporary.
Market Direction Closings For Oct 15 2014
The S&P closed at 1862.49 down 15.21. The Dow closed at 16,141.74 down 173.45. The NASDAQ closed at 4215.32 down 11.85.
The most important index though may turn out to be the Russell 2000 which today closed up 1.02% at 1,072.45.
Market Direction Technical Indicators At The Close of Oct 15 2014
Let’s review the market direction technical indicators at the close of Oct 15 2014 on the S&P 500 and view the market direction outlook for Oct 16 2014.
Market Direction Technical Analysis for Oct 15 2014
Stock Chart Comments: The most important event today was the reversal from the plunge. This has set the market up for a rebound rally as 1840 held despite the incredible selling volume and by the close the market was on the verge of taking back 1870.
Strong Support Levels are at 1870 and 1840. Both levels are strong enough to delay the market falling. Today the market managed to once again hold stocks above the 1840 level.
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 13% 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 at this time. That however could change if the selling intensifies. Today’s reversal from the heavy selling would indicate that 1750 may not be tested or reached, or certainly not over the short-term.
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 extremely oversold but turned up today..
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 Sept 10. MACD is negative and extremely oversold.
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 and extremely oversold but was starting to turn up near the close.
Rate of Change: Rate Of Change is set for a 21 period. Today the rate of change fell lower and is extremely oversold. With levels this low almost always a rally will commence.
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 up and it has issued a buy signal. It is 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 still signaling up and it too has a buy signal and it is extremely oversold.
Market Direction Outlook And Strategy for Oct 16 2014
The selling today was reminiscent of bear markets. Panic was definitely in the air. Whether this was a washout day or not, the market direction definitely reversed from a massive sell-off, the biggest this year has seen and definitely bigger than anything since April 2012. The VIX index hit $31.06 the highest level since November 2011. Without question investors were fearful. The problem though is that this is not a bear market, it is still a bull market caught in a correction. Corrections can seem as big and bad as bear markets. Today certainly felt that way but fundamentally the economy is not like 2007, 2008 or 2009. But stocks are incredibly emotional for most investors and a day like today sees all kinds of selling occur. It is difficult to be on the buying side in a market sell-off as big as today’s but that’s why putting a small amount of capital to work in a sell-off can work if the investors is careful what they choose.
On Thursday we get the Weekly Initial Unemployment Insurance Claims. If they point to a rise in claims then a rebound rally may fail but I doubt it. The stochastic indicators are pointing to a buy signal and the Rate Of Change is so deeply oversold that a bounce, even just a technical one seems to be ready. Momentum too is starting to push back from an extremely oversold reading.
I am expecting a rebound rally on Thursday. If it occurs it could be large and quick. Today’s volume showed that there were a lot of investors ready to place a bet that a bottom, even a short-term one, is in place and today was a panic wash-out. It may have been. It will take some time to tell. The problem right now for stocks is that there is room to climb back, but is there the strength of conviction to once again tackle the old all-time highs at 2019? Just as there have been catalysts to the downside, there have to be catalysts to drive stocks up. While a rebound rally will drive stocks up, it won’t last unless there is strength in corporate revenues and the economy to prove to investors that any global slowdown will not affect the US and that stocks are fairly valued when they climb again.
Rebound Rally
Tomorrow I am expecting a rebound rally, but there will probably also be selling in the morning and quite possibly into the close. If though the rebound rally is strong mid-day, then stocks should move higher into the close. Remember though that this will be a rebound rally in my opinion and unless investors find a catalyst to the upside that can push stocks beyond 2012, stocks will basically rally but eventually fall once again.
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