The market direction outlook for Monday July 28 was for stocks to be mixed with a 50/50 outlook. This means neither up greatly or down greatly but the possibility of a slightly positive or negative close. Like most days there are always mitigating circumstances and today was no different. The EU decided on sanctions against Russia over the Ukraine crisis and while they are reluctant to impose them, it would appear they may go ahead. This set the tone for selling in Europe which followed into North American markets to start the day.
Let’s take a look at the market direction intraday.
S&P Market Direction – July 28 2014 Afternoon
The one minute chart below shows the early morning selling. The market direction opened lower, tried to rally and then pulled back falling quickly though light support at the 1975 level. The selling bottomed at 1967.31 and then investors quickly turned around and shortly before noon they had pushed the market direction back up to 1975. You can see in the intraday chart below that 1975 has held for much of the afternoon. Shortly after 1:00 PM with the market still holding the 1975 level, investors bought further and pushed the S&P up above 1980. At one point, investors had also pushed the Dow above 17000 to 17001.38.
1975 – My Guide To Stay Invested
If you look at the 10 day 30 minute chart below you can see that 1975 continues to take on more importance the longer the S&P trends sideways. The 1975 level has been the support valuation that has driven stocks higher each time 1975 is broken to the upside. I have marked with smaller red arrows the each push above 1975 when the index have broken through. This is bullish of course, and can be used as a guideline.
Each time the S&P breaks through 1975 and stays above it, I increase the amount of capital that I am using. When the S&P falls below 1975, I reduce the amount of trading I am doing and keep a bit more capital back from the market.
1956 – Previous Guide
I was doing the same strategy by using the 1956 level as a guide. Each time the market moved above 1956 I would use more capital and each time the index fell below I reduced my positions. Now that the 1975 level is in place, I can use both of these levels to guide my investing while the market tries to push still higher.
Above and Below
When stocks fall below 1975 I stay invested but watch carefully the 1956 level. This morning for example, the S&P got down to 1967.31 and then turn back up. Since stocks failed to reach 1956, this morning’s selling was a signal to enter more positions which is what I did.
Even if you are not a believer in technical investing, the concept of using technical support valuations to assist in guiding how much capital or how many positions to open makes a lot of sense. Just glancing at the S&P chart you can see how often the index is moving back and forth around a support level.
I have used this method throughout 2014.
Staying Invested Via Guidelines
The support levels I keep referring to each night in my market direction outlook comments are the guides I am using to stay invested and know how much capital to invest with. For example when the market sold off in January it bottomed just below 1750. The 1750 level then became my guide for moving back into more positions. The next level was 1775. When the market moved back above 1775 I took on more positions than at 1750. Then the market pushed above 1840. 1840 was the new level and as long as stocks stayed between 1775 to 1840 I was not concerned about the market direction moving lower..
When stocks pushed above 1870, the 1840 level became the “line in the sand” for my trading. If the market fell back below 1840, I would drastically reduce my positions and turn to trading more to the downside. After 1870 there were two more support levels, namely 1919 and 1930. Today there are two more, namely 1956 and 1975.
Stepping Stones
Just as these valuations have been my guidelines acting like stepping stones as stocks moved higher, they will be my guidelines for stocks moving back down. At this point a drop back to 1750 would signal the largest correction since 2012.
By having my guidelines above, I would be well invested to the downside long before 1750 was ever reached. This is because, as explained above, if 1795 does not hold and stocks fell below 1756, I would reduce positions and start to trade to the downside.
If stocks kept falling through the support valuations shown above, each push lower would signal that I should keep reducing positions and turn more and more to trading the downside of stocks. By 1870 I would not be holding many “bullish” positions but instead would be almost 80% trading to the downside.
Outlook Into The Close
You can see then that support levels can be extremely useful is knowing how much capital to commit and when. They can be used to protect my capital against a downturn and they offer a lot of comfort when putting in place new positions such as I did this morning, at a time when stocks are sitting near all-time highs and the media is filled with analysts predicting dire consequences for the market direction in the weeks and months ahead.
Into the close the S&P looks like it will try to close positive even if only slightly. Meanwhile my outlook is for a slightly negative close, so there we have the 50/50 outlook for the day.
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