The market direction outlook for Wednesday was for some possible weakness in the morning but a higher close for the day. It was anticipated though that the advance for stocks would be smaller and it was the case. The smaller advance and weakness is a result of the three past days of rallying which has placed stocks into an overbought mode. Meanwhile investors are somewhat enthusiastic over the Fed comments still to come at Jackson Hole. This enthusiasm is being seen in their buying of stocks ahead of the Fed comments. Often when the Fed speaks at Jackson Hole there is a rise in stocks and then a sell lower before another rise back higher. All in all, there should be some opportunities for trades coming up Thursday and Friday.
SPX Market Direction Intraday One Minute Chart
The morning opened with a gap down which was almost immediately bought. Within a few minutes the market started to climb back and by 10:00 AM it had set a low back to the morning open. The rest of the morning the market rose until by 1:00 PM it was trading above 1985. From there a sharp decline around 2:00 PM took the market right back to the morning open or morning rally low. This was also seen as yet another opportunity to “buy the dip”, intraday and a sharp rally followed which took the S&P up to 1988. The close was just below at 1986.51 but remains bullish for Thursday.
The one minute chart for Aug 20 2014
Advance Declines For August 20 2014
Volume today was even worse than yesterday at just 2.5 billion shares. Only 49% of stocks were advancing and 47% were declining. 66% of volume was up and 32% was down. New highs though came in at 134 and new lows just 17. For a four days now the bulls have been in charge.
Market Direction Closings For August 20 2014
The S&P closed at 1986.51 up half of what was done yesterday at 4.91. The Dow closed at 16,979.13 up 59.54 but on the doorstep of 17000 which should bring in more selling on Thursday.. The NASDAQ closed at 4526.48 down 1.03..
The Russell 2000 IWM ETF fell 47 cents to close at $114.97. The IWM ETF is now back below the 50 day simple moving average (SMA) and during the early morning it almost reached the 100 day exponential moving average (EMA) when it fell to $114.41. Still this is not a concern as it is well above the $108 valuation which if the IWM should close below it would signal a full correction is underway. Today’s drop below the 50 day may be simply testing resistance and support before pushing higher. Like all indicators however, it always is worthwhile keeping an eye on the IWM ETF.
IWM ETF which replicated the Russell 2000 is back below the 50 day SMA.
Market Direction Technical Indicators At The Close of August 20 2014
Let’s review the market direction technical indicators at the close of August 20 2014 on the S&P 500 and view the market direction outlook for August 21 2014.
Stock Chart Comments: The most important aspect of today’s chart is that the 1975 level was not reached in the morning gap down and the market closed near the day’s high.
1975, 1956 Support: Both are light support and both may be tested in coming days but for the time being stocks look set to try to challenge the all-time high.
Strong Support Levels are at 1870 and 1840. At present I am not expecting any break of either of these levels.
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 more than 10% 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.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is positive and climbing..
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 buy signal on Friday August 15. MACD continued to climb today.
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 is still heavily overbought which can continue at this level for some time yet before pulling back, however a pullback to reduce the overbought condition can happen at any time.
Rate of Change: Rate Of Change is set for a 21 period. Today the Rate Of Change failed to turn positive yet again although it is almost neutral. Part of the reason is the poor volume in trading. While not overly a concern the Rate Of Change is advising that fresh capital is not finding its way into stocks during this latest rally.
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. The Slow Stochastic is signaling market direction is up and is overbought.
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 also signaling up for stocks and is overbought..
Market Direction Outlook And Strategy for August 21 2014
The technical indicators are very clear again today. The market is moving higher and will at some point challenge the all-time high unless a catalyst appears to the downside. Janet Yellen could certainly be that catalyst if she says anything contrary to what most investors are expecting. Another catalyst could be Russia and Ukraine again.
However for Thursday we are seeing more overbought signals which could slow down the progress of the advance. This morning’s gap down open was quickly bought so you can see that traders are still fully active in the market. However there is little in the way of new capital coming into stocks and that is a concern. Without new capital stocks can only push so high. Right now with slimmer volumes being traded it is easier for stocks to move up and down in larger swings. In the fall when volume increases, it will be more difficult.
Still though that’s weeks away. For Thursday stocks are set to take a rest any day now, but for Thursday investors may turn sideways ahead of Janet Yellen’s soon to be heard comments.
My strategy is unchanged. I am continuing to look for trading opportunities and applying capital to them as I find them.
For Thursday look for stocks to turn sideways but keep a bias to the upside.
For Members there has been a change in the medium-term market direction outlook which members can review here.
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