The market direction outlook for Monday was a mixed market with 4 technical indicators pointing down, but only one with a strong down signal. There were two that were positive but both were trending sideways more than up. This led to an overall outlook for a sideways day with a bias to the downside. However in the outlook comments I indicated I would be watching the first hour to make sure the 1870 level held. Stocks had no trouble holding the 1870 level and moved higher throughout the day.
The biggest news on Monday was the collapse of the deal for PFIZER to buy out AstraZenca. PFIZER moved higher on the news of the failed bid but AstraZenca collapsed 11 percent and brought down European equities in general. Apple, Google and Facebook moved higher dragging the market indexes higher. The NASDAQ had a reasonably good day.
Market Direction S&P Intraday Chart May 19 2014
The 1 minute chart for Monday below shows that almost the entire day was spent advancing. The opening saw a slight dip to 1872.42 and then stocks moved higher. With no selling and the 1870 level still holding stocks higher, investors pushed to around the 1880 level. By 11:00 AM stock broke through and moved to 1882. Most of the rest of the day stocks wandered just above 1882 and finally closed at 1885.08 near the highs for the day. All in all a fairly bullish day.
Advance Declines For May 19 2014
New highs on Monday came in at just 112 which was only slightly above Friday’s 91. New lows though were just 58 which was down quite a bit from Friday’s 82. Volume again favored advancing issues with 61% advancing with 1.6 billion shares trading to the upside and 38% of stocks falling with 1 billion 13 million shares to the downside. The market continues to favor the upside.
Market Direction Closings For May 19 2014
The S&P closed at 1885.08 up 7.22. The Dow closed at 16,511.86 up 20.55. The NASDAQ closed at 4,125.81 up 35.23 and back above 4100.
The IWM Russell small cap ETF was up 1.08% moving higher by $1.18 to $110.75 and closing back above the 200 day EMA..
Market Direction Technical Indicators At The Close of May 19 2014
Let’s review the market direction technical indicators at the close of May 19 2014 on the S&P 500 and view the market direction outlook for May 20 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. On Monday the SPX closed at 1885.08 and is within 5 points of 1900 again.
If you recall the image below from May 14 I commented how each new high in the S&P has been met with sellers who take profits and then wait for stocks to pull back and then load up again. This has been the main game all this year. Eventually it will end but there has to be a stronger catalyst to the downside for stocks. What we may have seen over the past several days was simply another pull back after setting a new intraday high above 1900 on May 13. This brought in sellers. We could be seeing the next move back up.
The problem though is that we need the small cap and the NASDAQ indexes to recover and move higher. Without their recovery any move up in the S&P and Dow must be treated as a selling opportunity. Stocks can move higher without the NASDAQ and small caps, but only for a short time. Eventually these two indexes either recover or they will pull all stocks lower. However without any serious catalyst to the downside the chance of a full blown correction is slim at this point. The Weekly Initial Unemployment Insurance Claims are pointing to no serious correction for stocks. I have used it for a market timing system for years with excellent results. While I am anticipating a correction over the summer period that will challenge the 1750 level I have no technical evidence to support this. It is simply an observation based on the poor performance of the markets this year. Without a catalyst though, stocks will not correct strongly but will only take short dips.
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 back to neutral.
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 weak sell signal on May 15. Today MACD is continuing to point to further weakness.
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.
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. 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 neutral to possibly up. The Fast Stochastic is at the point of possibly issuing a buy signal on Tuesday.
Market Direction Outlook And Strategy for May 20 2014
The trend sideways continues to be the dominant direction but the overall underlying bias has been higher for the entire year. There has been 2 shallow corrections but nothing of significance and nothing to challenge the general underlying up current in stocks. For Tuesday we see another mixed outlook. There are no strong indications of up or down. We have two indicators that are positive and pointing to slightly higher prices and we have two pointing to lower prices. There are two that are neutral.
There is nothing in today’s reading that would warn me to be overly cautious here. Instead the outlook is the same, stay cautious but invested through smaller positions and staying further out of the money when selling points, being sure to stay within support levels which will offer the best chance that the Put Selling I do will end with full profits and no assigned stock.
For Tuesday the market direction is mixed and the outlook is the same, sideways. The key support level to watch is still 1870. As long as stocks hold this level, I have a decent safety net for my trades. If 1870 breaks, then it will be time to close many trades and trade to the downside.
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