Friday was somewhat of a disappointment. My outlook was for stocks to push through resistance at 1840 and begin to make some headway. Instead investor jitters returned sparked in part by news that existing home sales plunged 5.1 percent making it the worst month in 18 months. Analysts felt that the numbers were an anomaly as the trend has been for improving sales since early last year. Despite this investors decided to move to the sidelines as the day came to a close and the markets ended in the red. Let’s take a look.
S&P Market Direction for Feb 21 2014
Friday’s 1 minute chart shows the problem the market had. In the morning a low was set right around 1840. From there, stocks pushed higher but then by 10:30 was back visiting 1840. Resistance is incredibly strong at this level and each time stocks push up to retake 1840 sellers emerge including automated selling. A second rally pushed higher than the first but by 11:00 am with thinning volumes the market direction turned back down and stocks began to slump back towards 1840. By 2:30 the market direction had broken back down through 1840 and a final rally failed. This brought in sellers to end the day back below 1840.
Advance Declines For Feb 21 2014
55% of stocks were advancing and 41% were declining. However there were 202 new highs and just 68 new lows. Momentum in the advance decline ratio continues to favor the bulls but the resistance at 1840 will soon break down the market direction momentum up.
Market Direction Closings For Feb 21 2014
The S&P closed at 1836.25 down 3.53. The Dow closed at 16103.30 down 29.93. The NASDAQ closed at 4263.41 down 4.13.
The Russell 2000 ETF IWM was up 36 cents to $115.66
Market Direction Technical Indicators At The Close of Feb 21 2014
Let’s review the market direction technical indicators at the close of Feb 21 2014 on the S&P 500 and view the market direction outlook for Feb 24 2014.
The 1750 level is holding the S&P up. Once again the 1840 level collapsed in the last hour of the day. The resistance is so strong here that stocks cannot attract new buyers to push strongly through. Thursday big recovery from Wednesday’s sell-off saw no confirmation on Friday. Never a good sign, the underlying technicals though still remain reasonably strong. However the market direction momentum to the upside cannot last much longer without the market breaking through. While momentum still supports the bulls, there are signs of weakness starting to creep in.
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 remained strong but pulled back further. If you look at the past two spikes higher in momentum, which I have marked A and B you can see that the rally higher on Thursday did not meet or exceed the previous spike. In other words, the last rally did not have the momentum of the previous rally. While still decent momentum exists these are signs the market is continuing to be plagued by a growing weakness.
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 from MACD is slightly lower again on Friday which indicates that the rally on Thursday did not bring stronger readings from MACD.
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 no longer extremely overbought and is rapidly falling back. Now down to 56.91 it will only take one more day of weakness in stocks for the Ultimate Oscillator to turn negative.
Rate Of Change is set for a 21 period. The rate of change of change on Friday poked back into positive territory. Although not very high this is still an encouraging sign.
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 lower. It is still overbought. The Slow Stochastic issued a sell signal on Wednesday which did not change on Thursday despite the big market rally. On Friday the sell signal grew in strength.
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 overbought but for the first time in a while, it is neutral with no direction up or down for Monday.
Market Direction Outlook And Strategy for Feb 24 2014
Let’s take stock of the technical indicators. Only one indicator, the Slow Stochastic is in sell mode. The fast stochastic and rate of change are pretty well neutral in their outlook. The remaining 3 indicators, Ultimate Oscillator, MACD and Momentum are all positive but declining. In other words none of the indicators are pointing to higher valuations any longer they are for the most part neutral to pointing to declining strength.
The problem for the technical indicators is the 1840 level has been repeatedly tested and re-tested without sufficient strength to push through. The constant retesting and inability to break through is reducing the strength of the market and that is being reflected in the technical indicators. In general then the outlook from a technical perspective is sideways with a bias lower. That doesn’t mean the market will end up in the red by the close but it does mean any move higher will be subdued and definitely any close above 1840 is suspect until it has stayed above 1840 for a few days. I had felt on Friday that there was enough momentum to keep the rally from Thursday pushing up through 1840. I felt sellers might step aside and let the market move higher. Instead sellers keep dumping shares at this level depressing momentum. The market can only go sideways for a short time now and without a break through 1840 the market has only one way to go.
Interestingly I read a report this evening that stock-find buying was at a three-month high but looking at the chart it was in High Yield Bonds, Japanese equities and then EU equities with the least amount flowing into US Equities. It’s rare when the average retail investor is right and with more inflows of capital it has to make the contrarian wonder if buying a few puts on the Spy ETF might be in order.
My personal outlook is still reasonably bullish. I still think the market direction can remain up and push through 1840 with enough strength but 1840 is definitely proving to be a challenge. My strategy is not changed much although I am focusing more on the stronger large cap stocks and placing less capital in those large cap stocks that have pulled back and not really rallied with the market. If stocks do break down and move lower before trying for another run-up I would think a second pullback would be deeper than the first. I still have a lot of cash and Friday’s expiration left a lot of my capital freed up and ready to go back to work. Monday then may end up lower by the end but I will be looking for any opportunities to place more capital to work.
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