The market direction collapse on Thursday is the second in less than a week. This kind of event does a lot of technical damage. Yesterday the Fed minutes convinced investors to get into stocks with the assumption that interest rates would take a long time to rise. Thursday morning though that change with the Weekly Initial Unemployment Insurance Claims coming in at 300,000, the lowest level in nearly 7 years. Investors were already concerned with the reports out of China that the economy was possibly slowing as Barclays lowered their forecast for GDP to 7.2 from 7.3. Add in a disappointing forward guidance statement from Bed Bath and Beyond and it was too much for many investors. Those who had bought stocks yesterday wanted back out.
Primarily the Weekly Initial Unemployment Insurance Claims show that the US economy may be heating up faster than first realized and this means interest rates will rise. There is little the Fed can do if unemployment drops further primarily because normally this will lead to wage increases which leads to inflation which will lead back toward a normal level of interest rates. Spooked by all the data from better employment than expected especially after last Friday’s employment number, coupled with many investors now believing that the quarterly earnings are not going to be enough to push stocks higher, and they sold out.
NASDAQ Plunge 3.1%
The NASDAQ has had its worse plunge since November 2011. It has now set up a pattern of lower highs and lower lows and today confirmed the move back down. It broke cleanly back through the 100 day exponential moving average (EMA)and closed at 4054.11 les than 50 points from breaking 4000. A break of 4000 would set the index up for a collapse of 371 points or a loss of 8.4%. That would not place it into bear market territory but it would break the pattern of higher lows and establish a stronger trend for more downside.
Market Direction S&P Intraday Chart April 10 2014
Just as yesterday’s market roared higher at 2:00 PM with the Fed minutes, today’s market gave back all the recent gains and more. The morning saw the market try to hold on for a little over an hour but there was no follow through from yesterday’s push higher, which was the first clue that the market was going to fall back. By 10:30 the market started to fall and within an hour it had broken through 1860. This brought in more selling which pushed the market through 1850 and then by later afternoon, the 1840 level was sliced through. This brought in even more selling and the market closed near the lows of the day at 1833.08.
Advance Declines For April 10 2014
Declining issues commanded a strong lead with 75% of all stocks falling and only 22% advancing. 75 new highs were made and 83 new lows. We are sure to see the new lows start to rise in coming days. Momentum even if there is a bounce again tomorrow, is on the downside now.
Market Direction Closings For April 10 2014
The S&P closed at 1833.08 down 39.10. The Dow closed at 16,170.22 down 266.96 points and through the 16200 critical support level. It will push to 16000 next.. The NASDAQ closed at 4054.11 down 129.79 points and ready to fall below 4000.
The Russell 2000 ETF IWM fell $3.29 or 2.86% not quite as much as the NASDAQ, to close at 111.96.
Market Direction Technical Indicators At The Close of April 10 2014
Let’s review the market direction technical indicators at the close of April 10 2014 on the S&P 500 and view the market direction outlook for April 11 2014.
The 1750 level has been holding the S&P up since the correction ended in early February. The Fed minutes yesterday changed the landscape but today’s employment numbers and fear of interest rate rises was too much for most investors. The market outlook has been shifted back to down. Tomorrow could see stocks try to bounce back above 1840, and it might even hold, but the outlook is poor especially with the NASDAQ plunge. The chance of holding 1840 is almost nil. There will be a lot of sellers now. The next move lower may be pronounced to start and then a drift down with little pockets of support but nothing until the 1775 level. The break just two days ago of the 1840 level was obviously a signal that the market was too weak. Today the S&P closed below the 50 day simple moving average (SMA).
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 yesterday and turned positive. Today it is back negative.
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. The sell signal of April 7 is still being flashed by MACD and is now falling faster.
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 and has turned back down as pushed into oversold territory.
Rate Of Change is set for a 21 period. The rate of change is was positive briefly yesterday by on Thursday it has turned negative again.
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 up but just weakly so and the heavy selling has probably pushed the readings slight askew. The readings are far closer to neutral than to up. Nonetheless perhaps it sees a bounce for early next week. It is oversold.
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 has turned right around today and is now back flashing sell. It is oversold as well.
Market Direction Outlook And Strategy for April 11 2014
I expressed my surprise yesterday at the push so high following the Fed minutes but acknowledged that it is hard to fight the Fed. However the unemployment numbers point to a return to some normalcy in the economy and if that happens investors know interest rates must rise. The Fed will have to act at some point and once again it will probably be sooner rather than later. Remember though that despite all the whipsaws, plunges and rallies, the market remains in a bull pattern until we see the market break through at the minimum a 15% decline. Normally a bear market is 20% decline in the indexes and stocks are a long way from that.
This is not a bear market and indeed we have seen this kind of plunge many times since March 2009, but this is the first plunge with stocks at such lofty levels. Even if the market should bounce back to move the S&P above 1840, the general trend has shifted for now. The Dow is only at the 50 day exponential moving average (EMA) but all indicators point to a correction. I had anticipated the S&P would make it to 1900 in April and then the spring or summer months would see the first serious correction since the fall of 2012. Yesterday though I thought the correction had been put back on hold thanks to the Fed. Today I would say that even if we move higher and the NASDAQ can stop falling, the trend up has been badly damaged and I will continue to trade with the focus toward downside action rather than upside.
I will not be doing an investing strategy notes for members in the morning on Friday. I explained in this article late this afternoon before the markets closed, my outlook and the strategies I will now be using. Starting tomorrow then, I will be shifting the focus of the trades toward downside movements. This does not mean I will not be trading rallies, but the focus has to be to protect capital from losses in downside movements. The collapse of the NASDAQ today could technically be a wash out for now and stocks might try to recover here. But I think it will be tough to recover with so many investors who will still want to get out on any rallies up. A lot of damage has been done and this kind of damage rarely can be overcome in a day or a week.
For Friday stocks could try to bounce, but I am back to my original outlook prior to the Fed announcement and that outlook was that any rally would fail and the move at present is to the downside as the market direction is moving into correction.
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