While the world waits to see if the US will intervene in Syria through military measures, the stock markets are attempting to regain their composure. It is important to understand that political events such as the Syria crisis are unpredictable at best. That unpredictability infects stock markets as well and investors as we all know, hate uncertainty. Yesterday’s big drop in the market direction was probably overdone but a lot of it also was caused by the inability of the stock markets to move higher daily. The stalling here and there of the stock markets gave investors pause and that pause turned into selling pressure. That coupled with the Syria crisis was all that investors needed to get the selling rolling. Yesterday though did a lot of technical damage to the market direction up.
Market Direction Intraday Technical Damage
Looking at the 3 month daily market direction chart below provides a complete picture as to the technical damage the S&P 500 has sustained. 1620 has become an important but weak area of support for this market.
A – Support was created at the end of May and early June when the 1620 level was tested and held. The S&P 500 then moved higher reaching 1650 before Fed Chairman Bernanke spooked investors with his musings about an early scaling back of Quantitative Easing. The support that had been built up in 1620 was easily broken. Within days the Fed chairman indicated that “early” could be a long time off yet. This stopped the selling and pushed the market direction back to up.
B – The 1620 level became resistance though and it took 5 trading days before the market direction was able to break out. This built more support for 1620 and the break commenced. By the time the market direction up had taken the 1650 level out, the market had developed reasonable support at 1620.
C – The recent pull back tested the 1650 level first which held until yesterday.
D – The heavy selling yesterday pushed the market direction almost all the way back to the 1620 level. The 1650 was easily broken yesterday which shows how little support there was at 1650. The 1620 support level though has a lot more support.
When 1620 Breaks
If the support at 1620 should break and there is a good chance that will happen, the move lower could be swifter than expected. Today’s market action appears more technical than a serious rally. The advance decline shows 2400 stocks advancing and 1500 declining at the noon hour. Only 45 stocks have made new highs while 148 have made new lows.
The pressure is on the downside and while a rally attempt may again be made even in the face of a military intervention in Syria by the Allies, technically the market direction up looks poor at this point. 1620 is an important level but when it breaks the market direction will easily push to below 1600, in my opinion.
Strategy At Present
At present then I am being careful to sell smaller quantities of puts and I am selecting at the money covered calls for my longer term stock holdings. I do not see any kind of “falling off the cliff” scenario. This is a bull market. But I do think the market needs to pull back, build strength and then decide if revenues are the economy are strong enough to sustain another attempt to a new high.
Summary of Intraday Outlook For August 28 2013
The bias remains to the downside so while today we could close in the green, the overall direction I believe will be lower until the market tests the 1620 level which will probably be sometime this week.
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