The market direction outlook for Thursday was for stocks to move higher, but I also explained why a cautionary stance is warranted at this point. This cautionary stance is not because of the Ukraine or Iraq but because of the nervousness of investors. Investors are like a herd of shoppers at a clothing sale. They watch the other shoppers to see what they are buying or rummaging through and will gravitate toward the other shoppers. Investors hate to miss a rally. I have read a lot of reports lately where investors explain why they are sitting out the “last 10%” of this market, but when you speak with them, they are not actually sitting out anything. They are still investing because truly, they want that last 10%.
Survival of Stocks
There is nothing wrong with this. There is no point in trying to convince yourself that you are willing to go to cash and will “stay on the sidelines”, which is another favorite expression. Instead it is better to understand when it is better to be cautionary and the steps to take to invest but add a layer of protection. Cautionary investing means taking on smaller positions, moving away from speculative and junior stocks and moving into large cap stocks that if the market corrects, you don’t mind holding. Even in the most severe moments of the last great bear market, stocks like Intel, Microsoft, Johnson and Johnson, Procter and Gamble, McDonalds, PFIZER, PepsiCo, Coca Cola and dozens more were worth holding and adding to existing positions because these are the stocks that will survive.
The Rotation out of Small Caps
At present the Russell 2000 is continuing to decline. There are lots of signals that this small cap index is in trouble, but the big cap stocks are moving higher. So what’s happening with the Russell 2000? It is actually pretty simple. The large investors who have been investing for decades know that with the markets sitting overvalued, there is only one place to move money and that’s into big cap stocks. This means the small caps suffer and as investors rotate out of small caps, the Russell 2000 index continues to suffer. Days like today just add to the decline of small cap stocks.
Today’s drop in the market seemed severe at 161.39 points on the Dow but that is still less than 1% as the Dow was over 17000. The S&P fell back 1.10% and the NASDAQ 1.41%. But the Russell fell almost 2% as once again investors keep dumping their small cap and speculative stocks.
Predicting Unknown Events
No one can predict an event like the airliner crash or the downed military jet in the Ukraine or a ground offensive into Gaza.. But the reaction of investors is typical and easy to forecast. Investors fear everything when it comes to investing and the worst fear is being caught in a downturn. So when selling starts it draws in more and more investors. By taking a cautionary stance and investing only in equities you believe will withstand bear markets, wars and calamities of all kinds, you are never trapped in an emotional state that can destroy a carefully established and managed portfolio.
Options Are Designed To Assist Handling Risk
Days like today show the power of using options. I have often repeated that it is stocks that are the risky asset and options are far less risky. Instead options are designed to assist investors in controlling risk. This is why I believe strongly in “stock and option” investing. By having a plan and goal and understanding rescue or repair strategies, investors can use options to generate income, limit or reduce losses and set up highly profitable trades that take advantage of heightened volatility.
Market Direction S&P Intraday Chart July 17 2014
The one minute intraday chart for July 17 shows the selling pressure which started shortly before 11:00 AM and lasted throughout the day. Over the lunch hour the 1970 level was broken through but then investors pushed back and moved the index above 1970. In the afternoon the S&P broke through the 1970 level again and after an hour of struggling to move above 1970, the index fell and for a brief moment broke the 1956 valuation level before closing above it at 1957.12. The problem though is the 1956 level was broken through and while it is only light support, it is still the first line of defence for the bulls at present. That means the likelihood of the 1956 level being broken and the index moving lower is quite high.
Advance Declines For July 17 2014
Volume remained fairly light today at around 3.4 billion shares, the same volume as Wednesday. 79% of stocks were declining and 83% of the volume today was to the downside. There were 86 new highs and 36 new lows. Yesterday I commented how the advance decline ratios showed that stocks were not as strong as many investors believed. Today’s dramatic downturn on the Ukrainian crisis shows how quickly sentiment can change.
Market Direction Closings For July 17 2014
The S&P closed at 1958.12 down 23.45. The Dow closed at 16,976.81 down 161.39 . The NASDAQ closed at 4363.45 down 62.52
The Russell 2000 IWM ETF closed at $112.48 losing the most of all the indexes with a decline of $1.76 r 1.54%..
Market Direction Technical Indicators At The Close of July 17 2014
Let’s review the market direction technical indicators at the close of July 17 2014 on the S&P 500 and view the market direction outlook for July 18 2014.
Stock Chart Comments: If you look at the chart above you can see the levels marked A, B, C and D. I have been explaining for several days the importance of the market in maintaining a similar pattern this time (point D)
This has not been the case and the break of the pattern on Tuesday I explained probably was setting the S&P up to fail on this rally attempt. Today’s decline while caused by the events in the Ukraine was probably going to fail either today or within a day, on its own.
Support levels at present are 1956, 1930 and 1919 which are all 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.
Today’s pullback tested the 1956 level. There is probably more testing and then a break of 1956 ahead.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. Today’s drop was the biggest since April 4. Whether this is the start of the correction I have looked for it hard to judge. There are so many analysts expecting a pullback that if this is the pullback for the summer, there will be a lot of analysts claiming “they called it first”. We will need a day or two to determine if this is the start of the long anticipated pullback.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is turned slightly negative today.
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 the sell signal is still active 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 neutral and ready to turn negative tomorrow should there be any amount of selling at all.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change is neutral but also ready to turn negative.
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 down.
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 now signaling a strong down move is possibly in the works for Friday.
Market Direction Outlook And Strategy for July 18 2014
No amount of technical analysis can prepare or predict for an event like the Ukrainian news today. These though can be the catalysts that start a change in the trend. The outlook for tomorrow then is for stocks to head lower. While there may be some sideways action in the lunch hour period overall there was technical damage done today to the present rally. In the past year, these types of events have had short-term impacts on the continual upward pressure on stocks. This could still be the case but when the market takes a tumble such as it did today, normally there is a “fallout” to contend with.
As explained last night, a cautionary stance is warranted. This might be just a few days of weakness and some selling but nothing more. On the other hand this could be the start of the much anticipated pullback for stocks as we head into mid-summer. For Friday I am expecting a sharp bounce to start the day and then more downside into the lunch hour. After the lunch hour I am expecting more selling into the close. I am not expecting a further large decline, but normally, the day after a day like today, stocks are weak and mixed as investors remain nervous.
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