The market direction outlook for today was unchanged from Wednesday’s outlook, namely mixed with bias lower. Wednesday would appear to have been a bounce back from the prior two days of selling and from reaching all-time new highs. Today’s move lower is being blamed on everything from the Fed minutes which yesterday investors seemed to like, to Portuguese banks to European GDP to poor Chinese export numbers and a plunge in Japanese exports. But the market direction higher has seen an overvaluation of stocks that many investors remain acutely aware of and are nervous trading. No one wants to miss out on another 5 or 10 percent gain for stocks, but at the same time, no one wants to be caught in the next 10% downturn either. No matter what analysts indicate, it is always better to trade what you see and at present we are seeing a market that is having trouble on a number of areas including nervousness with small caps and a growing worry once again with tech stocks.
Market Direction S&P Intraday Chart July 10 2014
The one minute intraday chart for July 10 below shows the early morning plunge which sliced right through the 1956 level. Within half an hour the market direction was pushing back above 1956 and seemed to regain its composure and moved back above 1963. An afternoon rally saw the S&P move to a high of 1,969.84, which then sparked more selling and pushed the index back to 1963. That level held which brought in some final buying into the close. Overall though the break of 1956 might be considered by some investors as a successful test and from here stocks move higher. However 1956 is extremely light support so the chance that this is a “successful test” of a support level is poor. Instead the ease with which investors dumped stocks at the open shows to what extent the nervousness is among investors. I doubt that this is the end of the weakness and stocks move higher from here. Let’s look at the technical indicators and see what they predict.
Advance Declines For July 10 2014
Volume picked up today with 3.1 billion shares traded but still below an average 4 billion share day. Up volume was trounced today with 72% of the volume on the downside. There were still 78 new highs but 32 new lows. Yesterday I had indicated that the advance decline numbers looked like a bounce back and not the start of a move back up. Today’s numbers confirm that yesterday was simply a bounce.
Market Direction Closings For July 10 2014
All the indexes closed well off the early morning lows. The S&P closed at 1964.68 down 8.15. The Dow closed at 16915.07 down 70.54. The NASDAQ closed at 4396.20 down 22.83.
The Russell 2000 IWM ETF closed down $1.24 or 1.06% although at the low of the morning it was down at $113.97. It closed the day at $115.25
Market Direction Technical Indicators At The Close of July 10 2014
Let’s review the market direction technical indicators at the close of July 10 2014 on the S&P 500 and view the market direction outlook for July 11 2014.
Stock Chart Comments: Over the past several days I have pointed out the importance of the 1956 area. Today it was easily broken in the early morning sell-off. I heard a number of analysts mention that it was a successful test and stocks should now move higher. This could happen, but the break was easy and the 1956 is very light support. More likely the next round of selling will move still lower.
I also discussed in the chart the levels marked as A, B, C and D. Today we saw a change from the previous patterns set out as marked A, B and C. We are still above the 1956 level so we have not yet set a lower high, but this bears watching. Any close below 1956 and I will hold short ETFs overnight.
Support levels at present are 1930 and 1919 which are light support. 1870 and 1840 are strong support. 1870 and 1840 at present mark important trading levels for investors. Both are now below the 100 day exponential moving average (EMA) so any pullback this summer which breaks 1870 should be used as a signal to commence picking up ultra short ETFs or spy put options 2 months out for a bigger move lower. A break below 1840 at present would challenge the 200 day EMA.
I have repeatedly mentioned two other support levels, namely 1775 and 1750. As the market continues to push higher, these are now critical support levels. 1775 is important but 1750 is now the bottom line. A break of 1750 would mark a severe correction of 11% at present which 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.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. At present about the only possible catalyst to the downside is poor earnings in the upcoming quarter which could catch many investors unprepared. The second catalyst we are now seeing develop is the slowdown in Europe and there could be something developing with the Fed minutes and their decision to end Quantitative Easing in October after years of supporting the market.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator over the past eight months, replacing MACD as the most accurate indicator. Momentum is still positive but moved 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 and continued to confirm that signal with a lower reading at the close 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 positive and continuing sideways.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change remains positive but is continuing to fall.
Slow Stochastic: 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 lower and it is building strength for a move lower.
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 issued a sell signal on the market direction on Monday. That sell signal continued today and is still strong.
Market Direction Outlook And Strategy for July 11 2014
The drop at the open this morning was stronger than most investors would have suspected. Buying at the open dried up quickly which is part of the reason stocks fell so low. Within half an hour stocks moved back higher as the low held but a lot of investors were selling into the move back higher. Down volume dominated the day.
Technically the indicators are evenly split. The negative indicators are continuing to build stronger negative signals. The three positive indicators are very close to turning negative but continue to show there is some buying among investors that is not just trading.
I am continuing to sell puts but I am staying further out of the money with my Put Selling. Almost all the my covered calls are being sold in the money. I have a lot of cash still not in use and waiting to move into additional trades. I am though still taking advantages of dips to try to nail down higher put premiums than usual in some stocks that investors are dumping at different times. Aflac stock this morning was one such trade. Placing offers to sell at prices higher than normal often end up being filled or partly filled. This is a good time for such a strategy.
For Friday stocks are still mixed but looking at the technical indicators I would have to give the bias to lower prices for the S&P market direction, particularly as many investors may not want to hold too many positions over the weekend. For tomorrow then the outlook is almost unchanged for the third day.
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