The market direction outlook for the start of February was for stocks to continue lower. All indexes were pulled significantly lower. Only a handful of stocks fared well with the majority of stocks plunging along with the market direction lower. The ISM numbers came in weaker than expected and new order growth plunged by the most in 33 years, Meanwhile spending on construction projects in December hardly rose. These were dismal numbers and its was the catalyst to start the selling. By the end of the day the S&P experienced the worst drop since June 2013 and the Dow was below the 200 day exponential moving average (EMA).
One piece of good news today came from Thomson Reuters who indicated that of the 250 companies in the S&P 500 that have reported earnings, 69.7 percent have topped estimates. This was the best “beat rate” since 1994 and the best rate of the past 4 quarters. The problem though was many investors felt that this was “old news” as it reflected the past quarter. They also pointed out that many estimates had been lowered in the weeks leading up to earnings season, which is quite true.
Market Direction S&P 500 Daily Chart for Feb 3 2014
The 1 minute chart for today’s action is below. The opening saw the market direction plunge quickly below the 1770 level. If you recall in yesterday’s market direction article I discussed the comment from Art Cashin that if the 1770 level broke he expected heavy selling. This break resulted in a short-lived rally. When that rally did not draw in investors, they sold the market almost continuously into the close. The S&P closed almost at the low for the day.
Advance Declines For Feb 3 2014
186 stocks made new lows on Monday and 50 managed to make new highs. 83% of stock were declining while 15% were advancing.
Market Direction Closings For Feb 3 2014
The S&P closed at 1741.89 down 40.70. The Dow closed at 15,372.80 down 326.05. The NASDAQ closed at 3996.96 down 106.92.
The IWM ETF fell 3.13% for the worst performance of the 4 indexes to close at $108.65.
Market Direction Technical Indicators At The Close of Feb 3 2014
Let’s review the market direction technical indicators at the close of Feb 3 2014 on the S&P 500 and view the market direction outlook for Feb 4 2014.
The 1750 level was broken today and while stocks attempted to hold the 1750 level, it eventually gave way during the afternoon selling. The next line of strength is below the 200 day exponential moving average (EMA) around the 1692 level. The strength of the selling means the market may try to recover the 1750 level. If it does try to capture 1750 during this week it will not be able to hold the level. When markets sell this heavy, it takes more than a few days for the market to recover. Therefore any bounce is an opportunity to buy Spy Put Options which is what I will be doing.
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 remains strongly negative.
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 Jan 8 2014 which was confirmed on Jan 9. MACD refused to turn positive since Jan 8. MACD remained strongly negative today and continues to point to more downside action.
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 while Friday it rose, today it fell quickly.
Rate Of Change is set for a 21 period. The rate of change is still negative and now turning lower. With a reading of negative 4.89, it is starting to reach the point where a change could happen to the market. This could be a rebound effort or it could be a break to another leg lower in the S&P.
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 is indicating that the market is down and it is extremely oversold with a %D reading of just 2.01%.
Market Direction Outlook And Strategy for Feb 4 2014
Today again the US dollar rose as investors rushed to the safety of the US dollar. Gold also rose. The climbing US dollar has to be a major concern for US exporters who have had some excellent years since the pull back of the dollar after the 2008 to 2009 credit crisis. The dollar’s rise may begin to impact exports and could lead to larger than anticipated deficits. As well the US Treasury Bonds and Notes are not rising but instead are continuing to fall. This was not anticipated by analysts who felt that the tapering by the Federal Reserve would probably push up rates. Instead rates are declining. With rates declining it is questionable what this is advising investors. Normally declining rates are good for stocks but at present many investors are worried that the decline in US Treasury Bonds and Notes is predicting a slow down in the US economy and possibly even the start of a recession later this year.
My outlook remains unchanged at present as I am trading the downside of the market. The market direction portfolio is performing exceptionally well. I have also done Spy Put Options trades almost every day. When doing the trading for pennies strategy I am only doing the downside at present. I believe it is important to trade the trend that is in front of us. That trend remains lower.
The Dow Below 200 Day EMA
Since Dec 31 2013, the Dow had fallen from the intraday high of 16588.25 to today’s intraday low of 15356.17 for a loss of 1232 points. This is a decline of 7.4% and is the biggest decline since the 7.5% decline last June. I would expect the Dow to try to push back above the 200 day moving average but at present that kind of recovery would be suspect. Normally declines last longer than what we have experienced to date therefore I would expect more downside ahead before the selling slows.
For tomorrow then I will be taking my time to view my stocks and decide which ones to commit capital to. I believe there is more downside ahead and I will be rolling covered calls lower, I will also be considering selling some call credit spreads. The biggest portion of my trading though is with the market direction portfolio, Spy Put Options and the Trading For Pennies Strategy. All of these I am trading to the downside at present.
For tomorrow we could see the markets try to recover but the selling in Asia is intense and could easily bleed over into Europe and then into North America. Any rally at this point will fail in my opinion and will be an opportunity to pick up more put positions for another push back lower. The trend remains lower for the present.
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