Market Direction today continued to follow the path of the market direction technical indicators. They have been quite accurate for much of the year so far. The number of correct market direction calls stands at 83% which is high, but then for most of January it was simply a matter of up and away. February has been tougher for the technical indicators as the stance remained primarily sideways with a bias to the upside. But as the market direction indicators supported this bias up, it has allowed me to stay invested while many investors worry about the market pushing into the all time highs.
There are some signs today though that the market direction up may be stalling. Let’s look at the S&P 500 for today.
Today’s Market Direction Action in the S&P 500
The first thing I want to mention is that I was somewhat surprised by today’s market direction action in the Dow and the S&P 500. I would have expected a bit of a rise in the morning and then a pull back to make sure the dip buyers are still there and then the gradual climb into the close. If we look at the five-minute chart of the S&P 500 for today there are some areas that give me “pause for thought” as they say.
The market direction on the S&P 500 today opened with a very nice pop similar to the past couple of days and typical of a bull market that is in rally mode. The S&P within a few minutes sets the level and then pulls back. Again typical. The first early morning high I have marked with a blue arrow. The pull back I have marked with a second lower blue arrow. A market that is intent on moving higher normally will pull back to the second lower blue line and then test it a couple of times and then push higher. It will not come back during the rest of the day. It can pull back a bit any number of times during the day but it will always keep putting in place a pattern that shows it is moving away from that lower blue line.
Instead today here is what happened.
POINT A shows just how many times during the day the S&P 500 tried to break through that early morning high. In other words first thing in the morning by 9:35 the S&P 500 had reached 1544.94 and then pulled back and finally by 1:00 PM it had tried to break through 1545 five times without any convincing break through. Finally by 1:30 PM the S&P, unable to break through begins to sell-off. By 2:00 PM it is down below the second blue line which is the early morning bottom. By 2:15 it is even lower having given back almost all the day’s gains.
The market then stages a rally into the close and by point D it is back trying to break free of the 1545 level and each attempt is pushed back. At point C the S&P 500 closes below the 9:35 AM opening high.
This tells me that the market direction is up against stiff resistance. It could simply be that investors were still nervous going into unemployment number tomorrow and they wanted to take a wait and see approach. I am not convinced though that is the case. If the unemployment numbers are decent the market should get a bounce but it could be just that, a bounce.
Tomorrow if the market direction does not break free I believe it will pull back to consolidate. Before investors email to ask if I will be buying Spy Put Options tomorrow, I can tell you now it is unlikely I will do so. I always wait for the signal to be a clear down. If for example the market opened up and then pushed lower than the open I will definitely be posting my outlook immediately as I will probably then buy Spy Put Options as long as the direction is clearly down. I don’t like to gamble or second-guess the market direction. I can make a profit no matter what the market direction does so I have no need to try to pick the top of a rally or the bottom. Once a trend is established it is easy to make a profit by staying with the trend so for now Spy Put Options are not on the table.
If the S&P tomorrow pushes convincingly higher than all may still be well and we could see the S&P 500 challenge its own all time high from 2007.
Market Direction Closings
The S&P 500 closed at 1544.26, up 2.80 points and the Dow closed at 14,329.49, up 33.25 points. The NASDAQ closed at 3232.09 up 9.72 points.
Market Direction Technical Indicators At The Close of Mar 7 2013
Let’s take a moment now and review the market direction technical indicators at today’s close on the S&P 500 and view the next trading day’s outlook.
For Momentum I am using the 10 period. Momentum is still positive and is continuing to climb even though the day’s action for market direction was more sideways than up.
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) yesterday, March 6 issued a buy signal. I indicated yesterday that we needed to see that buy signal confirmed today and this happened even with the market direction not really being very impressive. This is a good sign for the market direction to continue higher. Remember that MACD gathers its information from study the past movement in the market direction to predict future market direction. Therefore the market direction could shift down for a few days and MACD still signal market direction as being up. This is exactly the same thing which we saw in February with the market direction going sideways with a slight bias to up but MACD from Feb 4 to March 6 signaling market direction down after issuing a sell signal on Feb 4.
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 overbought but this time unless the market direction continues higher, the overbought level is less than the previous periods. Let’s look at the chart below to understand why this is important. In the S&P 500 daily chart below you can see the rally in January was very strong. The Ultimate Oscillator below the S&P 500 chart shows the buying pressure as the market took off in January. Look at how Point A was quite overbought, but the market still pushed on and point B and point C were each successively more overbought. Point D shows that this overbought condition was eroding. Basically this means that the pressure of the buyers was diminishing. This means that there are fewer buyers and those that are buying are not chasing prices higher. In other words, the mad dash at the start of January saw an influx of dollars and investors buying as quickly as possible. By point D that buying pressure was falling off.
From that point on you can see that Point E and now point F are overbought but certainly not to the extreme on A through point D. In other words the market is overbought but there is not a lot of buying pressure. Investors are sitting back and letting stock prices come to them. A lot of investors are already invested and not interested in buying further. This almost always signals that the market direction might shift to the downside to bring in more investors. However the extremely overbought period in early to mid-January may not return unless we see a correction large enough to get investors back interested in buying back in. To do that stocks need to either fall lower to entice investors with cheaper prices or pick up the pace as they move higher which will force many investors who are not fully invested to commit more capital as they will believe that the market direction may “blast off” to the upside and leave them behind.
One other aspect I would like to point out. Those investors who trade through the Ultimate Oscillator would have considered selling out of their positions at point G when the S&P 500 was at 1505. This is because when the extreme overbought condition started to erode a lot of traders believe that the big rally is over and from point G forward the market direction could easily fall back. By getting out at point G they would have given up on another 2.6% rise in market direction. However these are traders who do not worry about selling at market tops or buying at market bottoms. They trade the solid movements up or down and get out when the signals warn that the confirmed trend may be in trouble. By point G the drop off in the Ultimate Oscillator told traders that the mad dash part of this rally was probably over. If they had bought in early in the rally most would be out by now, waiting for the next signal.
Rate Of Change is set for a 21 period. Rate Of Change today is still positive but it is trending sideways or basically flat.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is overbought to the extreme and while it is still signaling market direction higher don’t forget that extreme overbought conditions in the Slow Stochastic can easily be a signal that the market direction will change.
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 also extremely overbought and again while there is always the danger that the overbought condition will end with selling and a market direction change to lower, the Fast Stochastic is signaling that there is still room on the upside. It’s up signal is stronger than the Slow Stochastic which has a K ready reasonably close to the D reading which is a signal that the market direction a couple of days out may be turning back sideways again.
Market Direction Outlook And Strategy for Mar 8 2013
The market direction outlook today was more detailed than I normally do but that’s because of what I saw in the market direction daily chart for the S&P 500. The market direction today exhibited a sideways pattern more than an up pattern. The move was still definitely up but it’s a tough call whether the sideways action was the result of a wait and see approach for tomorrows unemployment numbers or whether indeed the market will stall here.
The Dow has led all 3 indexes higher. It too though had trouble today maintaining an upbeat mood. Tomorrow we will have to see confirmation that the 1545 level can be broken convincingly otherwise the market direction could be about the chance either back to sideways or lower.
The market direction technical indicators are for the most part positive and that’s a good sign that even if there is some pull back it won’t be much. Tomorrow for my strategy of Put Selling I may be looking at a wait and see day. If the unemployment numbers are good, the market will probably rise but then I would want to see what next week brings as to whether the market direction up could still hold.
I don’t think the unemployment numbers will be poor as the Weekly Initial Unemployment Insurance Claims numbers have been quite decent. This should mean reasonably good numbers tomorrow which could be all the catalyst the S&P 500 needs for the market direction to break the 2007 all time highs.
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