The market direction today was for the bounce to continue but later in the week to see the bounce end and stocks move back lower. That though may have changed thanks once again to the Federal Reserve. In the afternoon the Fed minutes were released and they showed investors two key components of interest rate policies. The first was the removal of any reference to the unemployment rate goal set by former Fed Chair Ben Bernanke at 6.5%. Instead that goal is gone and in its place the Fed minutes indicate that they will “take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments” before making a decision on raising short-term rates.
In brief this means the Fed will be reluctant to raise rate quickly but instead rates will take their time rising. In my market direction comments starting on Friday I indicated that I believed the unemployment numbers worried investors as they showed unemployment was continuing to show strength particularly among the non-participating citizens. This would mean the Fed would probably hit its objective of 6.5% sooner rather than later which would mean investors feared interest rates would rise sooner rather later as well. This I believe was part of the reason for such heavy selling on Friday and Monday.
Today that selling ended with the Fed minutes which once again shows how accommodative they remain. A floor remains under the market direction.
Market Direction S&P Intraday Chart April 9 2014
Today’s chart on the S&P 500 shows the market direction trending sideways with a slight bias up. At 2:00 the market began a jump on the news of the Fed minutes and ran higher from there. In the early afternoon the S&P broke through the 1860 level and trended along it. The news from the Fed pushed the S&P up to the 1870 level within minutes of the news release and by the late afternoon, 1870 was broken through and the S&P closed at the high for the day.
Advance Declines For April 9 2014
Advancing issues picked up the pace in the afternoon and rose to 71% while declining issues fell back to 26%. New highs rose to just 91 versus 65 new lows but the move up in the afternoon could be the first jump to once more try to challenge the previous highs which will drive the number of new highs up. What investors really need to see here is new highs up around 250 and up. That would tell us that momentum is building daily to the upside.
Market Direction Closings For April 9 2014
The S&P closed at 1872.18 up over the 1860 and 1870 support levels. The Dow closed at 16,437.18 up 181.04. The NASDAQ closed at 4183.90 up 70.91.
The Russell 2000 ETF IWM rose $1.64 to $115.25. The NASDAQ was the big winner today up 1.72% and squarely above the 100 day exponential moving average (EMA) and set to challenge the 50 day simple moving average (SMA).
Market Direction Technical Indicators At The Close of April 9 2014
Let’s review the market direction technical indicators at the close of April 9 2014 on the S&P 500 and view the market direction outlook for April 10 2014.
The 1750 level has been holding the S&P up since the correction ended in early February. The Fed minutes have changed the market landscape again. The 1840 now becomes the principal support for the market. The 1850 level stood up fairly well to the selling. The 1860 level has very light support and the 1870 level has next to no support. However the Fed minutes is back once again telling investors not to worry. They are advising that we should stay longer still at what is now the longest Fed party in history. The market is definitely being manipulated here but it is pointless to fight Fed policy.
All the indexes jumped big on the Fed minutes. The S&P is clearly moving back to challenge the previous highs. The NASDAQ is set to try to challenge the 50 day simple moving average (SMA). The Dow is just 194.45 points away from challenging its all-time high. What a difference an afternoon can make.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past four months, replacing MACD as the most accurate indicator. Momentum was juiced by the Fed minutes today and has moved from negative yesterday to positive today.
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) issued a sell signal on Apr 7. That sell signal is still active but MACD is now starting to rise. It won’t take much to turn positive and issue a buy signal again.
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 negative but moving rapidly toward neutral.
Rate Of Change is set for a 21 period. The rate of change is once again positive, confirming the momentum indicator which is also positive.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the market direction is down but it too is rising and it won’t take more than a day to see a buy signal from the Slow Stochastic.
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 now signaling market up and issued a buy signal at the close today.
Market Direction Outlook And Strategy for April 10 2014
While the earnings from Alcoa may not have been enough to move the markets up, the Fed minutes certainly were. Removing the doubt over how quickly interest rates would rise pushed investors back into the buying mode. While I think it is dangerous for Fed policy to be strong enough to entice investors to keep pouring in capital with so many stocks clearly overvalued, it is also difficult to fight the Fed policy. This is why I believe so strongly in options being used in combination with stocks. Through option strategies I am able to earn profits but at the same time continue to protect my capital from the volatility and whipsaw of the market which is trading at a price to earnings ratio that is historically too high. That does not mean it cannot be pushed higher, but unless revenue and earnings support higher prices, eventually even the Fed cannot stop a serious correction.
The most important technical indicator is momentum at this stage and it turned sharp up today. Next up is the Fast Stochastic which looks out just one day. It issued a buy signal. All the other indicators are either neutral, working their way to neutral or negative but rising.
The outlook for tomorrow is for a possible quick jump at the open and then some selling and then a push higher as that period of selling in the morning will be seen as a buying opportunity by investors who did not get into stocks this afternoon.
My outlook had been for stocks to bounce, then move lower late this week. That now is off the table. Even if stocks do pull back late this week, it won’t be seen as much more than a buying opportunity. I still believe staying cautious is warranted. Fed policy can only do so much. On the one hand they are dangling the carrot of long-term low-interest rates in front of investors while at the same time removing liquidity every month from the market. Whether they can do this successfully and keep stocks pushing into new highs is unclear. One thing though is not unclear. The Fed will do everything it can to keep investors at this party as long as possible. To that end I believe strongly in the article I wrote in 2011 called Dance Near The Exit. So I will definitely stay at the party, but as I said in my original article, I will be dancing near the exit.
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