The market direction outlook for Monday was for stocks to attempt a rally in the early morning and then sell lower into the day. The market direction trend was lower and I suggested trading to the downside which is what I did today both with the Market Directions Portfolio and the Spy Put Options. Three days of selling has pushed the NASDAQ down below the 100 day exponential moving average (EMA). While it is still above 4000 which was the bottom of the last correction in January to early February, the plunge lower has set up the NASDAQ for a pattern of lower highs and lower lows. This classic pattern is typical of an index in retreat and normally sets up a correction. With the NASDAQ index so deeply oversold investors should expect a bounce back shortly but the ability of this index to regain the momentum up and break through the past three lower highs and continue with a sustainable rally, is, I believe, doubtful. This means that rallies need to looked at as technical bounces and should be used to trade against. Let’s look at the S&P from today to see what it is telling us.
Market Direction S&P Intraday Chart April 7 2014
Below is today S&P 1 minute intraday market direction chart. The opening saw the market quickly fall to 1854 and then a rally pushed back to 1864. In my comments last night I indicated that the market would try to rally but would fail. This is based on years of trading, but also based on technical analysis of many sell-offs. The sell-off often creates some opportunities which some investors will exploit. Combined with the oversold nature of the market itself, investors are almost always able to push the market back up. However investors are in general fearful of falling prices and normally any push higher will result in running into those investors who look upon a short rally as an opportunity to get out of their positions. They look upon the short rally such as the one this morning as an opportunity to get at least 10 or 20 cents more than they would have earlier in the morning. By 1864 then, investors ran into resistance and the market fell back to 1854. This brings in more sellers. When the 1854 level could not push back up, investors decided not to wait longer and they sold heavier pushing the market down to moderate support at 1850. It only took a few minutes to break through and that brought in more sellers. They quickly dropped the market down to 1841.48. At 1840 there is better support for the S&P and it showed as some investors stepped in and bought pushing stocks back up to just above the 1850 support level to 1852. This brought in more sellers who looked at the rally at the end of day as a “chance to get out” before “who knows what” might happen on Tuesday. They therefore start dumping stock again which pushed stocks down to 1845 at the close. 
At 1845, the S&P is stuck right in the middle of two bands of support. More selling tomorrow will push hard against the 1840 level. Investors who bought into stocks at that level will only defend for a short time. They will then begin to sell their shares which will push the market direction below 1840. Buyers will drop away quickly if that happens, knowing that they can pick up stocks cheaper by waiting for the frenzy to get out to end.
Advance Declines For April 7 2014
What is interesting about the advance decline numbers is that yesterday the numbers were not stronger to the downside. Today the numbers have picked up volume to the downside with 70% of stocks declining and 27% advancing. New highs are even more telling with just 44 new highs and 81 new lows. Momentum is definitely shifting to the downside by the close today.
Market Direction Closings For April 7 2014
The S&P closed at 1845.04 down 20.05 and almost matching Friday’s decline of 23.68 points. The Dow closed at 16,245.87 down 166.84 almost duplicating Friday’s decline. The NASDAQ closed at 4079.75 down 47.97 or half as much as Friday’s dramatic one day plunge of 110.01 points. This has set the NASDAQ up for the worst 3 days since 2011.
The Russell 2000 ETF IWM fell $1.67 for a loss of 1.46%. The Russell 2000 is now down 7% from its high set March 4 at $120.58.
Market Direction Technical Indicators At The Close of April 7 2014
Let’s review the market direction technical indicators at the close of April 7 2014 on the S&P 500 and view the market direction outlook for April 8 2014.
The 1750 level has been holding the S&P up since the correction ended in early February. Following Friday’s sell-off the 1870 level is gone for support and will become resistance in any attempt to move back higher. Meanwhile the 1850 level broke today but the 1840 level held and the S&P closed squarely in the middle of the two support levels. I felt the 1850 level might hold up a decline for perhaps 2 days. The selling though was too intense and it managed to hold on for just a few minutes today. The 1840 level is stronger but if selling is intense enough it will easily slice through and bring in more sellers. You can see in the chart above that the market on Friday hit the 1870 level and today the 1850 level. Basically the market fall is being slowed by the support levels but not supported. This is because when investors want out of their position, they will dump a stock at any price.
The S&P intraday just brushed the 50 day simple moving average (SMA). Unless the market can regain its footing here, it will break the 50 day within a day or two. Once 1850 breaks the market will easily fall further. 1750 is the strongest support but there is light support at 1775 would could help slow any pull back.
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 again today and is pointing to more downside ahead for stocks.
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. Today that buy signal ended after just 3 days. A sell signal was generated at the close today.
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 tumbled even further today placing it near oversold readings.
Rate Of Change is set for a 21 period. The rate of change was negative on Friday and had indicated that more selling would occur on Monday. That happened and the rate of change has fallen further again, indicating more sellers will want out of the market.
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.
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 given an extreme sell signal for Monday. For Tuesday the sell signal is as strong but it is also very oversold which could help bring in “bargain hunters” which will slow the decline.
Market Direction Outlook And Strategy for April 8 2014
About the only best thing that can be said for today is that stocks are now very oversold which should help slow a decline. Meanwhile the mood remains very nervous although the VIX Index only pushed to 16 and then pulled back to 15.57 by the close. This level of complacency even in the face of this much selling, cannot assist investors in my opinion. They need to look to strategies to benefit their portfolio to the downside and to protect against losses. A lot of investors have just returned to the market since December. Let us hope that this is not another case of them buying at the top again.
The Market Direction Technical Analysis is leaning heavily to the downside. There are strong oversold conditions that have developed which could help push stocks back up but overall any bounce would be technical in nature at this point. The S&P 500 is sitting right above the 50 day simple moving average (SMA). If it breaks through it will result in more investors selling out of positions. Each move lower brings in more sellers. The buyers on the other hand, will simply keep moving lower, picking their way through stocks here and there as stocks fall.
I will continue doing naked puts, but only on those stocks I would own and only in smaller quantities to keep cash ready for when stocks bottom from this correction. Stocks have experienced this type of selling before and then bounced back and moved higher. I could therefore be wrong and stocks could quickly regain their composure and move back up but the NASDAQ and the Russell 2000 are not indicating that will be the case at present and I am in agreement. By selling puts at strikes I consider fair valuation for stocks, I can continue to generate income even while stocks gyrate up or down. But the key to still selling puts for me is selling against stocks I would own and in smaller positions. This keeps a lot of cash to the sidelines which makes it easier to use rescue strategies and take advantage of other trades that may develop during the correction.
For Tuesday the market direction still looks like it wants to push lower. After two days of very heavy selling and large point losses I would have to believe a bounce is in order or at the least, a slowing down of the selling. I will be trading primarily to the downside using the market direction portfolio and in particular the Spy Put Options. If there is a bounce back tomorrow, I believe it will be only a reaction to all the selling and not a move back up. I will be using it to put in place slightly in the money covered calls on long-term holdings and I will be watching for opportunities in any bounce to put in place some naked calls.
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