Today’s bounce in stocks recaptured all of yesterday’s decline and set the indexes back at the opening numbers from the start of Wednesday. Basically then stocks find themselves back where they were when they opened for trading on Wednesday. Today’s action was interesting as US stocks finished higher against a backdrop of poor news from the Philadelphia Federal Reserve which reported a decline in the manufacturing index to negative 6.3 which is well below January’s positive 9.4. As well the news that China faced a contraction in their manufacturing coupled with a decline in European business activity didn’t seem to bother investors. They focused instead on Facebook’s bid of $19 billion for WhatsApp and the US flash purchasing managers index which jumped to its higher level in four years with a reading of 56.7 in February. These are good signs for a continuation of today’s rally. There is nothing better than the market moving higher on poor news.
Hewlett-Packard Results
HP results beat e3stimates and showed an overall 4% improvement in PC sales and grew its cash to 16.16 billion which is double what the company had in the first quarter of 2012. These after hours numbers should help bounce the market open on Friday.
The 3 month chart on HPQ stock shows some key aspects for investors interested in trading the stock. The first is that the momentum indicator has been declining while the stock has been rising. Volume too has been declining. Starting Friday investors interested in trading HPQ stock need to keep a watch on momentum. I would expect momentum to pick up after the earnings report but investors need to be sure that momentum continues to improve. It could easily jump for a day or two and then fall back. The same with volume. Any pullback in either or both of those indicators could point to a short-term top in the stock. Meanwhile The various support levels are shown below. Stronger support is at $26 and $22 and light support at the other levels shown. For investors interested in selling puts, put credit spreads may be a safer bet although the downside would seem to be limited over the next couple of months in the stock.
Sam’s Outlook
One of the more respected analysts is Sam Stovall, who is the chief equity strategist at S&P Capital IQ. Sam believes there is more upside to the market and less downside. In a note to clients yesterday he called yesterday’s action nothing to be concerned about. He indicated that stocks were “following the traditional pattern required to break above price resistance by making several attempts before that rusty door finally swings open.” Sam has seen decades of investing and his outlook is worth considering when it comes to placing capital at risk.
The Weekly Initial Unemployment Insurance ClaimsToday’s Weekly Initial Unemployment Insurance Claims came in lower than last week and continue to point to staying invested and looking for opportunities. You can read my review on this week’s numbers here.
S&P Market Direction for Feb 20 2014
Today’s 1 minute chart below shows the market direction action. The opening saw weakness as a sharp rally at the outset was cut short and the S&P fell to 1826. The market by 10:00 AM seemed to bottom as there was not a lot of selling pressure. Stocks rallied back and by 11:00 AM as they turned sideways there was very little selling pressure. The lack of selling brought in more buying and the S&P pushed above 1840 by later afternoon. The close was just below at 1839.78. The strength is enough that I would expect the S&P to break 1840 on Friday and continue higher.
Advance Declines For Feb 20 2014
Today was the opposite of yesterday with 63% of stocks advancing and 33% declining. 145 stocks made new highs and there were 82 new lows. The market continues to show a bullish overtone and today’s buying momentum seems to have squashed yesterday’s selling pressures.
Market Direction Closings For Feb 20 2014
The S&P closed at 1839.78 up 11.03. The Dow closed at 16,133.23 up 92.67 and still above 16000. The NASDAQ closed at 4267.54 up 29.59.
IWM recovered all of yesterday’s losses and moved up $1.23 to $115.30
Market Direction Technical Indicators At The Close of Feb 20 2014
Let’s review the market direction technical indicators at the close of Feb 20 2014 on the S&P 500 and view the market direction outlook for Feb 21 2014.
The 1750 level is holding the S&P up. Today’s bounce back recovered the entire loss from yesterday but not the loss from yesterday’s morning high. Still though, the 1840 for the first time looks ready to give up to the constant buying pressure and allow stocks to move higher. In my comments yesterday I indicated that if the market rallies on Thursday we need to watch for the market to push higher or turn sideways. If it turns sideways which is what we saw in January and which is in the chart above, then the likelihood that the market direction will pull back again, is high. Right now though today’s move higher looks reasonably solid. It does look like the 1840 level will finally break here.
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 today has recovered from yesterday and is back moving higher and gaining strength.
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 reading on Wednesday was 6.04 and today’s reading is the same. This is a reasonably good sign that investors will continue to buy and push valuations higher on Friday and into next week.
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 once again moving into overbought territory.
Rate Of Change is set for a 21 period. The rate of change is still negative but is climbing again as it works its way into positive territory.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the next market direction move is still lower. As this technical indicator looks out beyond a single day it could be signaling there will be some weakness to start next week. The Slow Stochastic 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 signaling that tomorrow stocks will be moving higher. The Fast Stochastic is overbought.
Market Direction Outlook And Strategy for Feb 21 2014
My outlook for Thursday was for stocks to attempt a rally but the rally would eventually fail. Instead though I am tempted to believe that today’s strength showed that investors have enough conviction to push stocks into a new high. Friday should see stocks move higher as momentum to the upside is building. MACD hardly flinched at yesterday’s decline. The Slow Stochastic is still pointing lower but the Fast Stochastic has changed to up. The biggest problem facing the market direction is still the overbought condition. This though can continue for some time yet and right now it looks like investors are looking for stocks to continue up.
The Weekly Initial Unemployment Insurance Claims still show enough strength that I see no tumble ahead at this point for stocks. My stance to the downside after yesterday’s drop I think was wrong. We will know tomorrow. If the S&P pushes decisively above 1840 then I believe the rally will continue higher. At this stage the most important aspect is to watch for the rally and see whether it can keep clawing its way higher over the next several days or turn sideways. As explained in the chart and comments above, if the market turns sideways that is a bad sign for stocks and the likelihood of a decline is much greater. I do not think that is about to happen. I believe investors will step aside and slow their selling as the S&P breaks through 1840. From there stocks will be at new all-time highs by next week in the S&P 500.
I am continuing to apply capital to trade opportunities as they develop. I see nothing that advises me to take a high cautionary stance.
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