The market direction today bounced back shortly before the lunch hour, but then drifted sideways awaiting the earnings report from Alcoa. A lot of investors are in a “wait-and-see” mode hoping for the market direction to recover and move higher but fearful the market will continue to fall lower. Because this is not a bear market, it is not unusual for a bounce such as today to be followed by further days of rising and then enter a period of more selling. In bear markets stocks tend to bounce back one day and then continue the plunge the next day. In bull markets during corrections often the opposite is true.
There are a number of technical events to report on so let’s turn immediately to the S&P to start.
Market Direction S&P Intraday Chart April 8 2014
Below is today’s S&P 1 minute intraday market direction chart. At the outset stocks continued to fall amd then spilled through 1840 falling to 1837.62 before recovering. This is a concern. The market should have held the 1840 level this morning with ease. Selling was not heavy at the time yet investors pulled back from buying which caused the drop.
The drop below 1840 however may have been considered a test of support at 1840. When the selling did not intensify, Investors pushed the S&P back to above the 1850 support level. Over the past several trading days I commented that the 1850 level had enough strength to possibly hold the market up for a couple of days. Today would mark day one since yesterday the heavy selling easily punched through. The recover back to 1850 was nice to see and helps to solidify support at 1850 but even moderate selling will now be able to break through.
The break in the morning though of the 1840 level was not good and could set up the market for another retest later this week. The close today saw the S&P near the highs for the day although once the S&P regained the 1850 support level before the lunch hour, stocks basically turned sideways and went nowhere. A bounce back even if just technical, should have moved stocks higher.
The NASDAQ Market Direction Outlook for April 8 2014
The NASDAQ is the index to be watching right now. The S&P is stronger but unlike the NASDAQ the S&P has never led the market since the bear market collapse of 2008 – 2009. The NASDAQ therefore should be watched closely. In the chart below you can see that by the close today the index is still below the 100 day exponential moving average (EMA). There are three levels that the NASDAQ must recover to confirm the uptrend is still in place. You can see them in the chart below. Normally a rally back from the past two days of selling would bring the NASDAQ to at least the 4200 level. If stocks can reach that level, then it becomes a question of whether they can push even slightly higher or if the NASDAQ will turn sideways from there. If it does turn sideways I will be selling in the money covered calls on some of my core holdings like Microsoft and Intel.
Advance Declines For April 8 2014
Advancing issues moved back to the forefront today with 66% of stocks advancing and 30% declining. But only 46 stocks made new highs while 73 made new lows. Despite the new lows out-numbering the new highs, the volume still favors more momentum to the upside.
Market Direction Closings For April 8 2014
The S&P closed at 1851.96 up 6.92 and back above the 1850 support level. The Dow closed at 16,256.14 up just 10.27. The NASDAQ closed at 4112.99 up 33.23.
The Russell 2000 ETF IWM rose 79 cents to $113.61 although earlier in the day it reached 114.20 for a gain of over 1% before closing lower.
Market Direction Technical Indicators At The Close of April 8 2014
Let’s review the market direction technical indicators at the close of April 8 2014 on the S&P 500 and view the market direction outlook for April 9 2014.
The 1750 level has been holding the S&P up since the correction ended in early February. As mentioned yesterday, 1870 is now resistance. The 1850 level broke yesterday but today it has supported stocks, albeit weakly. The 1840 level broke briefly today which was disappointing to see and could be signaling further trouble ahead but for now it is best to concentrate on the 1850 level to see if stocks will try to rally higher from there.
The S&P yesterday touched the 50 day simple moving average (SMA) and today it broke through for a few moments before heading back above it.
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 remains negative today but at least failed to fall further.
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. Today it confirmed that sell signal with a stronger signal to the downside.
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 sitting at extremely oversold levels.
Rate Of Change is set for a 21 period. The rate of change is still negative and continues to reflect capital leaving stocks.
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 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 is still showing market direction down for Wednesday but once again it is extremely oversold.
Market Direction Outlook And Strategy for April 9 2014
I wrote an article this evening on Alcoa Stock and whether I think its revenue and earnings are enough to turn the market direction back to up. Alcoa Stock might be able to assist a further rise in stocks for a day or two more, but overall I think investors will disregard Alcoa and concentrate on the next few revenue releases for the quarter.
The market direction technical indicators are still strongly negative. There are a few signs that stocks could still bounce again tomorrow, but aside from being technically oversold, there are no signs of a prolonged rally from here. Instead the technical signals in general point to more weakness for stocks.
It is important though to understand that corrections happen in Bull Markets and when they do, it becomes an opportunity for more profits. However if an investor is nervous and prefers to move to the sidelines, that too can be considered a strategy. I trade against stocks I would own. That makes a big difference when trading and applying strategies. The question for many investors though is whether the correction will become something more.
For example, this evening in my Alcoa article I commented on Dennis Gartman who is a well-respected investor and analyst. Gartman was 100% in stocks on April 1 and spoke about how bullish for stocks he was. That changed on Friday April 4 when stocks tumbled. He immediately went 100% into cash. He felt he spotted a top in the market. Gartman could be right as sometimes markets can trend sideways with slight dips for months before finally selling off. However I have yet to see this happen with unemployment still falling and no signs yet of a change in the economic outlook in general. In other words there are no signs of recession yet. That tells me that this weakness is a correction that is underway and may actually be continuing the correction from January.
For tomorrow I will be checking stocks at the open and then waiting to see whether the market continues to stay weak or tries to add to today’s little rally. There are lots of signs to watch including the two support levels of 1840 and 1850 in the S&P and the 100 day exponential moving average (EMA) in the NASDAQ. I am not placing more capital at present into naked put trades. I want to see further signals tomorrow before committing more capital at this point. I am not though removing existing capital from trades but am trading with the capital already in use. If the market direction does continue lower I want to be able to place additional capital back into trades at even better put premiums.
The market direction outlook for Wednesday then is for stocks to bounce higher but the technical indicators also indicate that stocks will move lower once the bounce is over.
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