Market Direction May Change Warns Market Timing Indicators

Market direction for this evening is once more a mixed affair. The market direction bias is still up with some warning that the stock market direction is overextended to the upside and needs to consolidate before pushing higher. There remains a lot of doubt among investors that this rally can move much higher let along capture the recent May highs and then the April highs. That’s a good sign for market direction as with more bears the market probably has a better chance to climb higher. But at the same time there are many problems ahead and many unsolved issues. It could be a tough climb for market direction from here.

Market Direction Breaks the 50 Day Moving Average

The 50 day moving average or what is actually the 50 period moving average, was broken today and the S&P 500 closed above it. The same move happened with the Dow and the NASDAQ indexes. These are good signs that the market has regained some strength. The VIX Index though did not close lower and instead closed unchanged from yesterday. This is not a good sign and could be signalling that more volatility is ahead.

You can see the present S&P 500 stock market chart below. In yesterday’s market direction and market timing column I indicated that the S&P 500 needed to break 1358 to set itself up to rally higher and try to break the May highs. These type of technical indications are not numbers drawn out of thin air. They have significance based on prior market direction peaks and valleys. 1358 marketed the first valley after the May highs. It is interesting how market direction pushed the S&P to an intraday high of 1363.46 but the S&P closed the day at 1357.98. Amazing how close to 1358 this is!

This is excellent for investors. We now have a yardstick to use to measure against this rally. If over the next few days the market wanders but does not break significantly lower, then the rally is in good shape to move higher. But if the market wanders and cannot break through 1358 decisively then the market direction will change and move back down, either to consolidate for another try at the May highs to wait out the summer months before a late summer or early fall rally.

Market Direction

Market Direction Chart Shows that today the S&P 500 closed right at 1358.

Market Timing Indicators For Market Direction

At today’s close despite the market direction continuing higher, there were a number of market timing indicators that flashed some interesting information and some warnings.

Momentum climbed today but only barely which reflects renewed hesitation on the part of investors.

The MACD Histogram is up again today moving from 6.01 to 6.93 and shows no signs of stalling out.

The Ultimate Oscillator pulled back today from extremely overbought readings but only slightly and remains very overbought.

Rate of Change though tumbled from yesterday’s reading of 4.61 to today’s reading of 3.26. If you recall from my article on early warning tools to spot a collapsing stock, rate of change is important as often when it does not rise despite the market rising, it is a warning that the rally may be coming to an end.

The Slow Stochastic reading is extremely overbought and with both the %K and %D readings very close to one another, it is a sign that a change in trend may be going to happen later this week.

Last is the Fast Stochastic which turned down today despite the rally in market direction higher. This move down is another warning that the market direction could be about to change. It is also extremely overbought.

Market timing indicators for the S&P 500

Market timing indicators are flashing a number of warnings that market direction may be about to change


Market Timing Indicators For The Dow Index

The market timing technical indicators for the Dow Index are showing the same signals as the S&P 500 stock market technical timing tools. Looking at the Slow Stochastic and Fast Stochastic readings for the Dow Index, you can see that both have %K and %D readings so close to one another that it would appear a change in market direction may be in the works sometime this week. Fast stochastic moved lower today as it did in the S&P 500 and the NASDAQ. Since it is a very short-term market direction indicator we could see a change in market direction as soon as Wednesday or Thursday.

Market Timing Indicators For The Dow

The Dow Market Timing Indicators are flashing the same warnings for market direction.

Market Direction And Market Timing Summary for June 19 2012

The market timing indicators are still pointing up but there are enough warnings signs across all three indexes to add caution to any long swing trades going forward. The VIX index did not change today which is normally not a good sign for a rally such as today’s. The fact that the fast stochastic in all indexes turned lower in the face of the rally as did rate of change could be the signal that tomorrow or Thursday may be pivotal days in this rally and market direction will change.

For investors looking to place covered calls, this may be the prime moment to sell some covered calls. Meanwhile for put selling I will be watching my stocks carefully for any weakness to sell puts. If market direction is about to stall out here it could be just a consolidation before a move higher or it could mark the end of this rally. The VIX index should have fallen lower today. It didn’t and could signal more volatility is ahead and market direction will turn back down.