The market direction outlook for Friday was for stocks to move lower but the chance of a rebound rally was still high. After 2 previous days of not rebound rally, the technical indicators were still hopeful for Friday but pointed down. Stocks finally rallied putting on an impressive show with the biggest one day gain since March 3. Still there are problems with Friday’s rebound. For Monday or certainly for the start of the third week of August, confirmation of the rally is important before jumping back in with more capital placed at risk.
Let’s take a look at Friday’s action.
Market Direction S&P Intraday Chart August 8 2014
The one minute intraday chart for the SPX for August 8 below shows that in the morning at the open the market moved up slightly but stayed below the critical level of 1919. Still though investor seemed to take some confidence from the US airstrikes in Iraq. Investors hate uncertainty and the airstrikes commencing, ended that uncertainty for what to do in Iraq. Whether the airstrikes were right or wrong was not being decided by investors. They just want the uncertainty to end. It did and stocks rather than rallying, did not fall. While not the same as a rally, not falling was just as good. As the morning wore on investors pushed to the 1919 level and then traded sideways in what was a flat session for two and half hours. Then news that Putin may be on the verge of de-escalating Russia’s involvement in Ukraine sent stocks up and through 1925.
With stocks back up over 1920, investors knew that the 100 day exponential moving average (EMA) had been retaken. These may not seem like significant technical indicators, but for many investors they are and the holding of the 100 day EMA meant that a lot of investors felt the recent pullback was probably overdone and coming to a close. That brought in buyers who in the last half hour picked through stocks and pushed many oversold stocks higher, closing the entire market back above 1930 at 1931.59.
Russia Recovered
When you look at the past 10 days in the 30 minute chart below, you can see that up to August 5 the market was holding the 1930 level and in fact may have been trying to recover until the news hit investors that Russia might possibly invade Ukraine, on August 5 around 2:00 PM. That sent the market direction collapsing from 1930 to below 1920. A rally over the next two days failed as the market fell to the lowest level of the past 10 days in what some analysts are calling a selling climax. The problem is volume was poor and showed no real sign of panic, just normal selling and repositioning.
Still, the news that Russia might be de-escalating the crisis jumped stocks in the afternoon on Friday and by the close of the day, stocks had recovered all that was lost from August 5. Basically the entire Russia “incident” was recovered.
Advance Declines For August 8 2014
A lot of analysts on Thursday were looking at what is known as the TRIN Index or ARMS Index as those of us who are older know it. This Index looks at the advance decline ratio to determine significant oversold and overbought signals to advise when the market could be ready to bounce. The TRIN Index was ready to bounce on Thursday although it did not happen, but by Friday prior to the open the TRIN was still lower and showed a significant bounce was possible.
This is what happened but on low volume of 2.9 billion shares. 80% of volume was up by the end of the day on Friday. 74% of all stocks were advancing. There were just 39 new highs and 56 new looks however which is one of the reasons the rally on Friday needs confirmation on Monday.
It would be nice to see volume pick up to 3.5 billion or more shares traded with new highs getting up to above 150. That would definitely signal higher prices are ahead. But the market is what it is and we will have to see what Monday brings.
Market Direction Closings For August 8 2014
The S&P closed at 1931.59 up 22.20. The Dow closed at 16,553.93 up 185.66. The NASDAQ closed at 4370.90 up 35.93.
The Russell 2000 IWM ETF rose $1.08 or almost 1% to close at $112.27. Remember that the “line in the sand” is the $108 level for IWM. Until that valuation is crossed down and lower, the market direction remains up.
Market Direction Technical Indicators At The Close of August 8 2014
Let’s review the market direction technical indicators at the close of August 8 2014 on the S&P 500 and view the market direction outlook for August 11 2014.
Stock Chart Comments: The most important aspect of today’s chart is the break back up through 1919, 1925 and a recapture of 1930. This close above 1930 places the S&P back above the 100 day EMA.
1975, 1956 Support: These two support levels have been broken and will now act as resistance.
Strong Support Levels are at 1870 and 1840. The 1870 level is below the 100 day EMA so I am expecting this pullback to reach that far but a lot now depends on how strong the recovery bounce may be. 1840 is below the 200 day EMA and would mark a serious correction. A break of 1870 is a definite signal that those investors not holding Ultra short ETFs or SPY PUT Options 2 months out, should be doing so by this point for a bigger move lower.
The other two support levels not shown in the chart above are 1775 and 1750. I have explained that these two are critical support for the present bull market. While 1775 is important it is 1750 that is now the bottom line.
A break of 1750 would mark a severe correction of 180 points which is below a 10% correction from the most recent high. This would be the biggest correction since April 2012. A pull-back of that size would definitely stun investors at this point and it is not something I am anticipating as there are no signs of any impending correction of that magnitude. If stocks did get this low it would become questionable if the correction would move down at least another 5%.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. The market fell to 1910 before bouncing back on Friday. We will know this week if this is the end of the pullback I had been expecting.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is negative but rising.
MACD Histogram: 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 sell signal on July 8. Today the sell signal continued but is moving higher.
Ultimate Oscillator: 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 was deeply oversold and had signaled a bounce was imminent. That bounce occurred on Friday and the Ultimate Oscillator is now close to turning positive..
Rate of Change: Rate Of Change is set for a 21 period. Today’s the Rate Of Change remained negative on Friday and continues sideways with a slight bias to the upside..
Slow Stochastic: For the Slow Stochastic I use the K period of 14 and D period of 3. As the Slow Stochastic tries to predict the market direction further out than just one day. Last week for Wednesday and Thursday the Slow Stochastic had kept signaling that the market direction was up. The market finally bounced on Friday. At the close on Friday the market direction was still being signaled as higher. As the Slow Stochastic looks out more than a day, this tools is advising that by mid-week, stocks will be higher. The Slow Stochastic is oversold.
Fast Stochastic: 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 pointing to stocks moving higher for Monday and the reading is a strong up signal. It too is still oversold.
Market Direction Outlook And Strategy for August 11 2014
On Thursday I had written for Friday’s outlook that “You can be sure that if I change my outlook to lower with no rebound rally, the market will rebound.” The outlook for a rebound late last week was based on the extremely oversold nature of stocks. The problem was too much geopolitical information for investors and too much uncertainty. On Friday investors breathed a sign of relief and bought stocks as they felt the air of uncertainty was now lifted.
Personally I have doubts about Putin backing away. Everything I have read would indicate that his next move with be contrary to what the media and many analysts are thinking and saying. The next move from him may indeed be an invasion. If that happens stocks will tumble.
But the technical indicators are starting to point to a recovery rally being possible which may last longer than just one day. The two stochastic indicators are positive and the Ultimate Oscillator is ready to turn positive as well. The other three indicators are still negative but they too are rising. Technically the outlook is mixed at present but the bias is definitely for more upside on Monday or Tuesday of this week.
Confirmation Needed
What investors need to see now is confirmation that the rally is back on and then they will risk their capital. The rally despite its strength is still suspect both on breadth and volume. On Friday the market spent a lot of time wallowing around the 1919 level before finally breaking to the 1925 level.
This year almost every rally has lacked confirmation the following day or two after. We shall see if Monday confirms the uptrend for stocks that started on Friday. Meanwhile my outlook is split as I too want to see better confirmation that stocks are moving higher before putting my capital back to work in stocks.
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