Market Direction Technical Analysis Outlook for Dec 11 2012 – Up But Cautious

The market direction spent a lot of time doing nothing today. The Dow tried to climb but without any news or reason to move higher it closed up only slightly. The NASDAQ also managed to move up slightly. The problem the market direction is continuing to have is that the move higher is not being supported technically. This does not mean the market direction cannot continue higher but these are warning signals that not everything is right with the recent rally.

The December Effect and Market Direction

A major reason I prefer Put Selling to owning stocks is because of environments like the present one. The market direction fell last month and then has struggled back but without any solid technical evidence to support a sustained rally. There is nothing in the technical readouts that indicate that this is a new leg higher that will hold. But it is December and a lot of investors are looking for a December rally. Shortly investors will begin to look for a Santa Claus Rally as the end of the month arrives. December historically is a good month for stocks and sometimes this type of sentiment can be self-fulfilling. Investors want to believe in the market direction moving higher because it is December, and in the end they manage to push the market direction up.

I prefer to be Put Selling in this kind of environment. Investors can push as hard as they want, but I will take my Put Selling profits and stay clear of stocks that could end up with a pullback right after December. Remember, even in 2008 investors managed to squeak out a rally in December.

Market Direction Strength Is Needed

Technically I need to see strong support from the technical indicators and in particular MACD that signals that all is right with a rally before put aside caution. Right now MACD keeps falling daily despite the market direction trying to climb higher. Without strong technical support the next leg higher in the present rally is simply skating on thin ice. It can keep skating for a long time, that’s true, but once the ice breaks we can find a lot of investors in trouble.

For this reason my strategy remains with selling in the money covered calls on my longer-term portfolio and retirement account, Put Selling out of the money on my big cap dividend paying stocks and using the Trading For Pennies Strategy and Spy Puts Hedge for daily swings in the market direction.

Market Direction Technical Analysis For Dec 10 2012

Let’s look at the technical indicators for today and see what has changed.

For Momentum I am using the 10 period. Momentum is still positive but is trending sideways.

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) is still positive but each day it continues to pull back slightly. This has been a continual erosion of support to the rally. Each time the S&P 500 moves higher, MACD pulls back slightly. The same is found on the Dow Index. This is a signal to be careful. It is not a signal that the rally may fall apart or is on borrowed time. It is though a cautionary signal warning that the rally does not have a lot of strength or investor conviction.

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 climbing from Friday’s close.

Rate Of Change is set for a 21 period. Rate Of Change is positive but like Momentum, it too is trending sideways.

For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is overbought and while the signal is up, it is almost neutral.

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 overbought but is signaling that market direction is still higher.

Market Direction Technical Analysis Dec 10 2012

Market Direction Technical Analysis from the close of Dec 10 2012

 

Market Direction Outlook For Dec 11 2012

On the weekend I indicated that the market direction technical outlook was for the market direction to remain up for Monday. The fast stochastic is definitely supporting higher prices for tomorrow. There are though more indicators that are showing weakness to the rally and in particular MACD needs watching because as explained, it is signaling a lack of strength to the rally. In my strategy article on early warning tools to spot a collapsing stock which you can read through this link, I show how MACD is an important technical tool that advising when a rally in a stock is suspect and could be about to pull back. The pull back does not have to happen overnight. In fact it can take weeks, but what MACD is warning is that the rally does not have strength and to be cautious. Presently in this rally it is issuing the same warning on the S&P 500 and the Dow Jones.

To stay in this market requires cautions and careful planning. I am still invested as I believe strongly in the stocks I am selling puts again but I also have strategies available to assist in any market direction change and unless the technical indicators become more convincing, I won’t be surprised to see this rally end shortly after the new year.

Market Direction then for tomorrow is for the market to continue to push higher.

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