The market direction outlook for Friday was for stocks to turn sideways and rest. Instead investors were back buying and stocks moved higher with the Dow making up the most ground of the three main indexes. Stocks in general are very overbought and due for a pullback at any time. Many analysts are surprised at the strength and speed of the recovery. Personally I am more surprised at the lack of strong volume when the rally first started. Let’s look at Friday’s action to start and see where we might be heading on Tuesday.
S&P Market Direction for Feb 14 2014
Friday’s 1 minute market direction chart is below. The morning saw a small amount of weakness and the S&P pulled back to 1825.59. That brought in more buyers and the market by 10:30 was already over 1835. This seemed to give investors a reason to pause and I thought we might have seen the high for the day. After 1:00 PM though investors noticed that there was very little downside pressure and they returned and bought more pushing the S&P back above resistance at 1840. This was an incredible move when you consider that in the morning the low was down to 1825.59. This move of 16 points amounted to 0.87% from the morning low. This is also astounding considering that just 7 trading days earlier the S&P was at an intraday low of 1737.92. This amounts to a gain of 103.08 or 5.9% in just 7 days.
It also created a sharp V rally. This correction took 8 days to reach a bottom and now 7 days to recover. Over the course of 15 trading days we are right back to the same resistance line at 1840 on the S&P. At this point the market direction back up appears willing to try to break through, but momentum may not be enough to break. If the break of 1840 doesn’t occur than a drop to at least 1800 to 1780 is not out of the question.
Advance Declines For Feb 14 2014
Friday saw 65% of stocks advancing and 32% declining. There were 158 new highs on Friday and 71 new lows. The trend still favors higher prices for stocks according to the advance decline ratio.
Market Direction Closings For Feb 14 2014
The S&P closed at 1838.63 up 8.8. The Dow closed at 16154.39, up 126.80. The NASDAQ closed at 4244.03 up 3.36.
The IWM ETF closed up just 16 cents at $114.06
Market Direction Technical Indicators At The Close of Feb 14 2014
Let’s review the market direction technical indicators at the close of Feb 14 2014 on the S&P 500 and view the market direction outlook for Feb 18 2014.
The 1750 level is holding the S&P up. The market closed today just below major resistance at 1840 after breaking through briefly during the day. Momentum to the upside continues to be reasonable decent but overall, 1840 looks to be a tough level to hold. The rally back up has been swift and in 7 days the S&P has reached the 1840 level. The S&P is just 12 points away from a new record. It has been an amazing rally back which has confounded many analysts.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past two months, replacing MACD as the most accurate indicator. Momentum on Friday returned to pushing higher which could indicate that the S&P will break through 1840.
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 buy signal on Feb 11. The buy signal continued stronger on Friday with a reading of 5.86.
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 continues to be very overbought. This doesn’t mean the market direction will turn down immediately but it does indicate that the move up could stall at any time.
Rate Of Change is set for a 21 period. The rate of change was negative on Friday but did push back as it struggles to push into positive territory. The overbought nature of the market and the lack of conviction among a lot of investors has the rate of change still negative. It is the only indicator that has refused to support the rally back high.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling again today that the market direction is up for Tuesday. It is 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 is also indicating that the market direction is up for the eighth day after issuing a buy signal on Feb 6. This is rare for the fast stochastic after 8 days. It too is signaling overbought.
Market Direction Outlook And Strategy for Feb 18 2014
After 8 straight days of up signals from the Fast Stochastic the chance that this will continue is slim. It is rare when the fast stochastic is up this many days in a row. With the Fast Stochastic and Slow Stochastic now overbought and the Ultimate Oscillator very overbought the move higher looks ready to stall here. The S&P has recovered back to major resistance at 1840 which could mark the first top for this rally.
Meanwhile momentum and MACD both are still quite bullish which would seem to indicate that any stalling of the market direction here could be fairly short. The problem for the S&P now is either it must break resistance at 1840 and move higher or pull back. There is no alternative. Even a sideways movement will not last at this height.
For Tuesday I think the rally is at a crossroads. It needs a new catalyst now to break into much higher prices otherwise it will stall and move slightly lower. For Tuesday morning stocks could start with a quick weak open and then a rally higher and by lunch hour a sideways movement that could last into the afternoon for a lower close. Overall though I do not see anything on the immediate outlook that has me worried about stock prices tumbling. I am therefore continuing to look for more opportunities as the week starts.
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