Yesterday, after the close I wrote how the market direction should attempt a rally here. What has happened though is that the 1600 support level on the S&P 500 has been broken by yesterday’s 2.5% plunge. The past two days have done a lot of technical damage to the market direction trend up and a lot of emotional damage to investors. Long-term investors this morning are back worried about another 2008 to 2009 type bear market. Others are concerned that the market direction will not be able to recover but will collapse below the 200 day moving average bringing in even more declines.
Market Direction To 10:30
This morning, we can see that the expected bounce back is weak. The key points are in the 1 minute chart of the S&P below. I have marked the 1600 level which was support but is now resistance.
There have been two rally attempts to retake the 1600 level which I have marked A and B. Both points A and B were met with sellers which is exactly what happens after a plunge like yesterday. As soon as a rally starts nervous investors who did not get out yesterday, sell right away and start to unload their positions as they worry about further declines.
The push back at point B was weaker than point A and it was followed by a third little rally at point C which established the usual pattern of lower highs. As soon as that rally attempt failed, a waterfall decline pushed the S&P back to the open at point D. This could easily just be a retest of the lows and a more sustained move up could start. It could also take a few days for the market direction to sort itself out. My bet is on lower prices ahead for much of the summer months which are traditional weak.
Market Direction Intraday June 21 2013
Market Corrections With Big Declines
When market direction moves to big declines such as yesterday, rallies almost always fail. It takes time to rebuild investor confidence and the conviction to own stocks. It is into this volatility that those investors, such as myself, sell puts against big cap stocks because of heightened volatility.
Put Selling When You Do Not Want To Own Stock
When the market direction turns down those investors who are Put Selling but do not want to own stocks, need to take smaller positions and look for every opportunity of a rally back in market direction to close their naked puts for profits. In a downturn of the market direction it is almost always better to wait for a stalling of the downtrend before engaging in Put Selling again when you do not want to own stocks. The problem is the volatility will be lower when the downturn stalls and appears to have ended. This means that the fat put premiums will quickly erode and Put Selling is not nearly as profitable. It is a question of risk versus reward. Selling puts when you do not want to own stocks and when the market direction is collapsing is highly risky for setting yourself up for assignment of shares. Often earning less in put premiums is better than the risk of stock ownership so prudence would dictate that waiting for a possible bottom makes more sense.
Market Direction Outlook – Bull Market
Remember that this is a bull market and until that bull market ends you cannot simply short the market and expect to immediately be profitable. Bull markets have underlying strength and sometimes what might start as a severe correction can turn out to be the start of a move back higher. This is why I stay with my short-term Spy Put Options for trading against a downtrend. I can never know when a downturn or a market direction correction will end in a bull market. Investors are driven by fear. Fear of missing a rally and fear of getting caught in a downturn. Bull markets can be very surprising and like all markets can be manipulated.
Nibbling and Pushing The Market Direction Up
The stock markets are tiny when compared to bonds and other asset classes. This makes the stock markets easier to manipulate. Often in a bull market downturns are considered excellent opportunities by large traders to build positions in stocks. As a stock falls they nibble away until the market direction begins to turn sideways. They then only need to start doing a bit more buying to commence a rally in a number of stocks. This feeds on itself and soon investors are back buying and a recovery looks to be at hand. Most often it fails and it is just an opportunity made by the bigger investors to continue to pocket returns.
Market Direction Outlook The Morning After
A plunge like yesterday has to be worked out. A big rally back would only fail until confidence returns. With so many stocks still overvalued in my opinion, stocks are in need of a normal valuation and that means moving lower until the “normal” values are found. It has been a great rally, but in my opinion the next couple of months look to be volatile and I believe markets will move lower before the market direction can move back to a sustained up. This type of market is ideal for my style of investing where I sell puts against stocks I would own. I look forward to some very substantial returns in the coming weeks as volatility should stay higher increasing option premiums, both puts and calls.
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