The market direction outlook for Wednesday was for stocks to attempt a rebound. Stocks did try but where once investors were ignoring the bad news earlier this year, they are now paying attention to it. Europe continues to face economic slowdowns and banking issues continue to crop up. In the US, the economy is growing but housing is not participating. Worries about when interest rates will rise continue to hound investors. Ukraine looks set for a more protracted battle with the remaining rebels as it would appear Putin has no intention of giving up his support for the rebels. More articles emerged today including many from Russian media sources indicating that Putin is determined to take the Ukraine and may invade under the guise of a humanitarian mission. All of this weighed on stocks. Let’s take a look at today’s action.
Market Direction S&P Intraday Chart August 6 2014
The one minute intraday chart for the SPX for August 6 show the rebound rally underway in the morning. The rise was choppy and tested all along the way but sellers held off. By noon the SPX had reached 1927.91 on poor volume and against a backdrop of more stocks moving lower despite the index moving higher.
The inability to recover 1930 brought in sellers who kept pushing the index lower all afternoon. By 2:00 PM the 1919 support level was being tested constantly. The close managed to push above 1919 to close at 1920.24.
Advance Declines For August 6 2014
By the end of the day, volume was up by about 100 million shares to 3.5 billion. Volume was almost evenly split with 51% of volume moving down and 48% moving up. Advancing issues though had the upper hand by the close with 58% stocks advancing and 39% declining.
New highs though hardly budged from Tuesday with 27 new highs and 66 new lows.
Market Direction Closings For August 6 2014
The S&P closed at 1920.24 up just 0.03. The Dow closed at 16,443.34 up 13.87 but failed to revisit the lows from Tuesday which is bullish. The NASDAQ closed at 4355.05 up 2.22.
The biggest surprise for a second day was the Russell 2000 IWM ETF which closed up 35 cents at $111.73.
Market Direction Technical Indicators At The Close of August 6 2014
Let’s review the market direction technical indicators at the close of August 6 2014 on the S&P 500 and view the market direction outlook for August 7 2014.
Stock Chart Comments: Today stocks basically held to the 100 day EMA. The SPX remains virtually unchanged.
1975 and 1956 Support: Both of these levels have been broken through and may act as resistance to any attempt to push back up.
Support levels at 1930 and 1919 are both light support and are being tested at present. The 1930 support was not recaptured today while the 1919 support was broken but the market managed to push back and close just above the 1919 support level for a second day.
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. I still believe there are too many signs against a bear market or a severe correction beyond 10%.
At this point the 1919 level has been severely tested and while it held up again today, it may give way tomorrow.
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 and pushing lower.
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 to gain strength.
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 now deeply oversold and keeps signaling a bounce is coming.
Rate of Change: Rate Of Change is set for a 21 period. Today’s the Rate Of Change remained sideways and negative.
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 pointing to stocks moving up for a second day. It is extremely 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 lower however the readings are deeply oversold and often that means a rebound could occur.
Market Direction Outlook And Strategy for August 7 2014
You can see in the Fast Stochastic chart that the %K reading is on the verge of crossing up and over the %D which will signal a move higher. The readings are so close in the Fast Stochastic at this point, that while stocks might move lower, the bias would be more to the upside than down. Especially with the readings so low, the chance of a rebound is strong. The technical indicators in general are almost unchanged from Tuesday. While this may not seem bullish, there is some strength from the ability of the market direction to hold to the 1919 level despite repeated attempts to break below it by the more bearish investors.
You can see from the advance decline ratios that the bulls still have a slight upper hand although new 52 week lows are moving ahead of new highs. However for the market direction to turn decidedly lower we need to see better than 125 new lows a day. That would signal a strong move lower.
While my personal outlook is that stocks are headed lower, especially after breaking the 1919 level on Tuesday, there are still signs that the market direction rebound has more to play out. The fact that the markets did not revisit the lows from Tuesday are a good sign from the bulls that the drop on Tuesday afternoon was an overreaction by investors.
The Russell 2000 as well is holding tight here and for the IWM to signal a true market correction is underway, the IWM needs to fall below $108.
The biggest gamble for investors right now is in Ukraine. The chance of Putin escalating events is very high. Some political and military observers believe the chance of more intervention on the part of Putin is as high as 80%. This could definitely stun stocks and send them a lot lower. Sanctions have done little if anything to dissuade Putin. The chance of Russia entering on the guise of a humanitarian mission is high. At this moment I would estimate that this is the biggest problem facing stocks.
My strategy is to stay cautious and sell out of the money positions against stocks I would own if assigned. I am selling far smaller positions and doing a number of credit put spreads. I am not doing naked calls or credit call spreads simply because the market could rebound.
For Thursday I am expecting stocks to attempt once more to rebound. If that fails for Thursday I am expecting the market to move lower.
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