The market direction outlook for Friday was dependent on how investors perceived the employment numbers. At the outset, investors seemed pleased and pushed the indexes higher. Eventually though a lot of investors probably saw that the number of long-term unemployed was dropping for the 7 month in a row. This is usually the final stage in a recession recovery. Normally this happens within the first 2 to 3 years after a recession. This shows just how tough the recovery has been for many unemployed. But with another month showing a drop of around 110,000 from the long-term unemployed a lot of investors must be considering that the Fed Quantitative Easing is definitely going to end and interest rates can only rise shortly thereafter.
Market Direction S&P Intraday Chart April 4 2014
Below is Friday’s market direction chart. The opening saw a push higher to 1897 but there was not enough strength to the upside. Two more attempts failed. Investors noted the triple top. They also noted that the S&P was less than 3 points away from 1900. This brought in sellers. As the morning wore on selling began to pick up and no rally back had any strength. By the afternoon you could see that a lot of investors had decided it was time to get out and began selling. The S&P 500 made a low of 1863.26 before attempting a late day recovery which failed. It was not a great day for the S&P, but it has had a lot worse.
Market Direction NASDAQ Intraday Chart April 4 2014
The NASDAQ index was unique on Friday. From the open it was already experiencing selling. There was no rally to start off the day. a short, feeble rally back attempt at 10:00 AM was met with more selling and specs stocks like Facebook, Twitter and even bigger spec stocks like Amazon plunged through the morning. This created almost a straight line lower as the NASDAQ fell 125 points from the opening of 4263.94 to 4138.47 by the noon hour. From there the NASDAQ basically drifted sideways with a bias lower into the close. Overall though, the damage was all done by the lunch hour.
Advance Declines For April 4 2014
The most amazing thing about Friday’s plunge had to be the advance decline numbers. 63% of stock declined versus 34% that advanced, but 180 stocks made new highs and only 68 made new lows despite the carnage from sellers. Still though as explained numerous times in the past in my market direction outlooks, for this market to get momentum going to the upside stocks need to see the number of news highs up into the 300 daily range and higher. While the number of new lows was encouraging on Friday despite the steep declines, momentum remains to the bulls, but it is not robust and there is a definite weakness still within stocks.
Market Direction Closings For April 4 2014
The S&P closed at 1865.09 down 23.68. The Dow closed at 16,412.71 down 159.84. The NASDAQ closed at 4127.72 down 110.01 for a loss of 2.6%.
The Russell 2000 ETF IWM fell $2.71 for a drop of 2.31% coming close to matching the NASDAQ loss. The small caps and tech stocks are the stocks that are being primarily hammered at this time. That could easily spread to other stocks including big caps if selling were to intensify.
Market Direction Technical Indicators At The Close of April 4 2014
Let’s review the market direction technical indicators at the close of April 4 2014 on the S&P 500 and view the market direction outlook for April 7 2014.
The 1750 level has been holding the S&P up since the correction ended in early February. There are three support levels that should be watched after Friday’s action. The first was light support at 1870 and it broke easily. We could see the S&P try to recapture 1870 at the open on Monday but any push back after the heavy selling on Friday will fail in my opinion and the market will move lower. The next level of support which is somewhat stronger is at 1850. That level should be strong enough to stand up against selling for perhaps 2 days, but that would be about all it could withstand. The third level at 1840 is far stronger. It should be able to withstand more selling that the 1870 or 1850 level however if the market pushes below 1850, investors may already be in a selling mood and they could break 1840 quickly. If that happens then look for a much stronger correction that we saw in January to February of this year. A correction of 10 to 15 percent could be in the works.
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 fell on Friday and moved into negative readings. It had only been positive for 6 days in the present rally.
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 Feb 13. On April 2 the MACD issued a buy signal on the S&P. On Friday MACD pulled back considerably from Thursday’s reading and is now at plus 0.16. This is a low reading and will easily be turned to a sell signal depending on the direction on Monday.
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 took quite the tumble on Friday. it is pointing to more selling for Monday.
Rate Of Change is set for a 21 period. The rate of change was negative on Friday and is indicating that more sellers are arriving probably for Monday.
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. It is now overbought.
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 had signaled that the market direction was up. The intense selling has pushed the Fast Stochastic to an extreme sell signal for Monday.
Market Direction Outlook And Strategy for April 7 2014
Friday’s plunge in the NASDAQ has done some technical damage. While not extreme, it was still strong and the other two indexes followed the NASDAQ lower on Friday, just not to the same extent. That could set the indexes up for further declines on Monday to match the losses of the NASDAQ index. Investors are nervous about stocks and as usual, heavy selling always brings in more sellers which in turn brings in even more sellers.
The employment numbers certainly frazzled a lot of investors who see rising interest rates as returning sooner rather than later. The market direction technical indicators for Friday were fairly positive on the market direction remaining up. By the close on Friday, the reverse was true. Momentum, the Ultimate Oscillator, rate of change, Slow Stochastic and Fast Stochastic were all negative and the Fast Stochastic especially, was pointing to a strong move to the downside for Monday. Only MACD managed to cling to a positive reading but only barely.
I had felt on Thursday night that there was the possibility of some selling even with good employment numbers, but I indicated that I believed the market would recover and return to moving higher. That may happen later this upcoming week, but the severity of the selling on Friday was extreme and that normally means more than just a few days of weakness lie ahead. That means rallies are suspect and should be carefully watched. It also means closing positions that are profitable and waiting for clearer signals as to what the next market direction move may be.
The technical indicators on Thursday did not foresee the plunge in the NASDAQ as happening on Friday. Instead I believed that the earnings report from Alcoa on Tuesday could be the catalyst to the downside for stocks if they failed to meet analysts estimates which are at 5 cents a share for the quarter. That may now not be the case. Instead if Alcoa does not meet estimates we could see selling intensify on Tuesday.
Friday’s plunge did some technical damage and while not severe, it is rare when the market direction can just turn around and recover the momentum to the upside after such a tumble. Instead on Monday, normally stocks see a bounce back attempt at the open and then more selling to the downside. From there stocks drift sideways but lower into the close.
This is what I am expecting for Monday. Aside from this I will be trading to the downside in the market direction portfolio and Spy Put Options as I believe at this point, any rally back up will fail on Monday and the outlook is down at present following Friday’s drop.
Aside from using downside trades such as the market direction portfolio and Spy Put Options I will be carefully watching the naked puts and put credit spreads I have in trades at present for any need to roll lower as well as possibly further out in time. Following Friday’s plunge, it is worthwhile to stay cautious and look for a clearer signal before risking more capital to the upside. I also need clearer signals that a correction is now underway before risking capital in naked calls or call credit spreads. In my case I am only in large cap stocks and since I would own shares in all the companies I sell put options against, I have no trouble with any possible correction.
I had expected any decline or correction to not start until into May or June. With the sell-off on Friday, investors may have taken a knee-jerk reaction on the numbers but the severity of the selling tells me that there is more downside ahead and it will probably be early this upcoming week. For Monday then I am expecting a rally attempt in the morning which will fail and then more selling to lower valuations in the afternoon. I am expecting a lower close.
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