The market direction outlook for Friday was for the market to attempt a rally in the morning but close lower. Instead we saw the rally late in the day as investors pushed back when they noted that the NASDAQ was not falling further. This bolstered investors who had been disappointed by a reading from the University of Michigan consumer sentiment which showed a decline to 81.8 which was below the expected 85. These numbers continued to move investors despite the fact that 81.8 is a very high reading for consumer sentiment. It is however the expectation on the part of analysts and investors that keeps investors on edge. This is sort of like a blind date. Your expectation is that the date will be beautiful or handsome and the reality is your expectation was too high.
Housing starts for April though came in at 1,072 million versus 980,000 estimated. So here the analysts expectations were low and housing starts came in higher. You must admit that investing is certainly interesting.
One other aspect to mention is bond yields. Bond yields continue to fall despite analysts warning that interest rates are ready to rise. The bond market is obviously in disagreement here. The 10 year Treasury bond actually closed at 2.52 percent on Friday after rising to 2.66 percent on Thursday amid the sell-off after starting the week at 2.47 percent. You can tell that bond investors in general believe that while interest rates may indeed rise, it will be the short-term maturities that will be hit the hardest. There is a strong consensus that we are in a period of ultra-low interest rates almost world-wide and that is not going to be ending anytime soon. With growth sluggish and even growth in China slowing, the case for rising interest rates that will affect 10 year or longer maturities has very little substance. The only problem for bonds may be inflation which this past week came in at an annualized 2% rate. Still though fighting inflation does not seem to be high on the agenda right now for the Fed, particularly when this past week Janet Yellen again commented that the non-participation rate is far too high.
Market Direction S&P Intraday Chart May 16 2014
The 1 minute chart for Friday shows some important keys to understand what is happening. On Friday instead of an opening rally investors sold but volume was poor in the morning selling and as such there was no traction to the downside. 1864.82 was the low and that happened early in the morning. From there the market rallied back to above 1870. 1870 is important and as well saw on Friday there was a lot of trading at the 1870 level. However each time the 1870 level broke the selling was muted and the market held just below 1870 but well off the morning low. This brought in investors in the late afternoon who then pushed the S&P, Dow and NASDAQ into positive territory and into a higher close. 1870 over the past several days has become more and more important for support of the market. The S&P cannot simply move higher and higher with support levels. The only other support in the S&P at this moment is the 1840 level. That is too low for the market to be able to move higher and stay higher which is part of the reason why the S&P keeps having trouble. 1870 has obviously been targeted by many investors and traders as key and every time it looks to be able to hold, they jump in and buy which pushes valuations up. Most however are still taking profits into the close, especially with the weekend in front of them.
Advance Declines For May 16 2014
New highs on Friday came in at just 91 and new lows were 82 but that was not the important key to the market direction. It was in volume with 65% of all stocks advancing and just 32% declining. When attempting to put in place trades for the day it is always worth checking the advance decline volume. In the morning shortly after 10:30 advancing issues were quickly outpacing declining issues. For those investors who like myself like to trade the Trading For Pennies Strategy or market direction, that told me to turn back to the upside for those trades. More on that is in the USA Members section.
Market Direction Closings For May 16 2014
The S&P closed at 1877.86 up 7.01. The Dow closed at 16,491.31 up 44.50. The NASDAQ closed at 4090.59 up 21.30
At one point in the day the Russell 2000 IWM ETF was down to 108.03 but that was well off Thursday’s low of 107.44. By the close of the day the IWM ETF closed up 69 cents to 109.57. The IWM ETF is still below the 200 day exponential moving average (EMA) which could be bearish for small caps.
Market Direction Technical Indicators At The Close of May 16 2014
Let’s review the market direction technical indicators at the close of May 16 2014 on the S&P 500 and view the market direction outlook for May 19 2014.
There have been two key support levels in the market following the sell-off which ended in early February. They are the 1750 level and the 1775 level. Those levels are now quickly moving into longer-term support. If the market were to fall back to those levels it would mark a full correction in stocks. If 1750 were to break, stocks would move considerably lower as a lot of investors would bail out at 1750. There are though two key levels now worth watching. The first is 1840. In the last small pullback in mid April, 1840 was the level that held the market in check. Since then support has been building at 1870 and as outlined in my notes above, 1870 is quickly becoming important support for a move above 1900. For 1900 to be held, there must be a support base. 1870 is that base and 1840 is the second base which 1870 has built upon. That means anytime stocks slide below 1870 watch for any movement back up. If that happens such as we saw on Friday, it is an indication that stocks will recapture the 1900 level and try to build more support to push still higher. If 1870 breaks then trade the downside until the 1840 level. For the 1870 level to break, the market has to close below 1870 for at least 3 days and each day must see a lower close. That is the signal to change to the downside for longer-term trades.
I am still anticipating a correction this summer but stocks can surprise and at present the sideways action still has a bias to the upside. That bias is obvious if you look at any chart of the S&P. While choppy, the direction does still point to up.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past four months, replacing MACD as the most accurate indicator. Momentum is slightly negative at the close on Friday.
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 a buy signal on April 22. Today MACD issued a weak sell signal on May 15 and confirmed that sell signal on Friday. However the sell reading is low so once again we could be back to more sideways action.
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 continuing positive and moved sideways but not down or up.
Rate Of Change is set for a 21 period. The rate of change is still positive and it too is trending sideways.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling market direction is down for the start of the week. It is not however overbought.
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 signaling that the market direction is down but Friday saw a sharp reversal which is seen in the technical chart. This is important and may point to an upsignal by the close on Monday. The Fast Stochastic is also not overbought.
Market Direction Outlook And Strategy for May 19 2014
It is amazing this year how long the market direction has been moving sideways. This reminds me of the market in the early to mid 1990’s when for weeks on end investors waited for a correction in the market which just did not happen. Instead the market direction slowly climbed with tiny sell-offs marking every new high as investors were quick to take profits. A lot of that was because of fear of another 1987 crash. The same might be said for today’s market. Analysts continually are warning that there is more downside risk than upside potential. This is because not only is the market direction sitting quite high, but also the memories of 2008 to 2009 are hard to forget.
This makes it difficult to trade unless you have a plan. My plan is straight forward. I am still risking capital but only in stocks I would own. I am taking on smaller positions and leaving a lot of capital to the sidelines. I am taking advantage of dips to be selling puts but most put strikes are far enough out the market that the stock has room to pull back without leaving me in the money. In this kind of environment I don’t think speculative stocks should be used. As we have seen from the carnage of the NASDAQ spec stocks and the small cap spec trades, these stocks can really plunge. These are not the types of stocks I would ever want to hold if assigned so why would I trade against them. To remain invested in the present market, I believe only large cap stocks with growing revenue numbers should be used.
For Monday we have a mixed outlook for the market direction. We have 4 technical indicators pointing down, but only one has a strong signal. There are two that are positive but both are trending sideways. Overall the trend is still sideways with the bias to the downside. I do not like to second guess the technical indicators so I will stay with sideways with the bias lower but I will be watching for signs on Monday that stocks may want to push higher as the close on Friday pointed to a higher day on Monday, not technically, but from the aspect of volume and sentiment. The market direction at the open will be important. I will be watching the first hour. If the market moves down in that first hour then we could see a rally in the late morning. 1870 is the key to understanding the market at the moment. As long as market direction stays around 1870, I will be continuing to place additional trades.
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