The market direction outlook for Tuesday was for stocks to continue their move sideways. The selling on Tuesday was caused first by poor retail numbers and even poorer forward guidance by Dick’s Sporting Goods, Staples and Home Depot. Home Depot closed up but still missed on their numbers but managed to convince investors that their forward guidance outlook for improvement in coming quarters would happen. I have a lot of doubt their outlook will be reached but it was a nice strategic move on their part to release poorer numbers, even after their outlook had been downgraded twice by analysts, and then basically tell investors that “things were improving” and the numbers will be better in coming quarters. The general consensus now seems to be that revenue will do better in the second quarter. Again, I have a lot of doubt that will occur. Urban Outfitters fell almost 9% on the news that their profit dropped 20 percent in the first quarter. Retail today was getting hammered.
Target Stock Drop
Meanwhile Target fired the head of its Canadian operations amid mounting losses. They don’t seem to understand that they bought out a discount chain, Zellers, and shoppers are expecting discounted prices. Instead prices in Canada are higher than when Zellers occupied the same store space but quality is no better. The stock closed down to $56.61 for a loss of 2.88% on the day. At the present time I have no positions in Target stock but if it keeps falling I will enter through selling naked puts.
The Fed Comments
The second reason for today’s sell-off came from Fed comments from Federal Reserve President Plosser, regarding the Fed probably needing to raise interest rates sooner rather than later for the economy. Minutes later there was talk from a number of well-known analysts indicating they believed the US economy was already in recession. So on one hand investors could worry about a possible recession and on the other hand they could worry that interest rates would rise shortly. Yet the bond market seems to be indicating that low-interest rates are here to stay for quite some time yet. Overall then it was a challenging day for investors which means taking profits. Once some investors start to take profits others join in because that just is the way for investors.
Market Direction S&P Intraday Chart May 20 2014
The 1 minute chart for Tuesday below shows the early morning selling which halted around the 1878 level. When the 11:00 AM rally failed to break the opening high, investors began to sell the market. This was right around the time when the Plosser made his comments which seemed to increase the selling pressure. The S&P fell back to 1870 but after over an hour of trading, the 1870 level held. Late in the day the market pushed higher and closed back above 1870. 1870 remains the key to the present market. Remember, even if it closes below 1870 investors need to see a couple of days of closing below 1870 to confirm the move is definitely lower.
Advance Declines For May 20 2014
New highs on Tuesday came in at just 83 and new lows were almost identical at 80. 69% of stocks were declining on Tuesday while just 29% were advancing. Volume though deeply supported the move lower as 2.4 billion shares traded to the downside while just 574 million traded to the upside. Overall though volume was lower today than Monday.
Market Direction Closings For May 20 2014
The S&P closed at 1872.83 down 12.25. The Dow closed at 16,374.31 down 137.55. The NASDAQ closed at 4,096.89 down 28.92 and just below 4100.
The IWM Russell small cap ETF was down 1.53% to close down $1.69 to $109.06. Still though this is still higher than May 15 when the close was $108.88. Today’s close saw the Russell 2000 back below the 200 day EMA.
Market Direction Technical Indicators At The Close of May 20 2014
Let’s review the market direction technical indicators at the close of May 20 2014 on the S&P 500 and view the market direction outlook for May 21 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. 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 higher levels that have now gain prominence. 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 also been building at 1870. 1870 is 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 a bounce back up. As long as that occurs the market will stay intact. The more often the 1870 level is tested though, the more chance that investors will move lower with their bids and the 1870 level will break. Today is the fourth day the 1870 level has held the market up. This will not last much longer. Four days of pressuring and investors are bound to move lower with their bids. It is only natural. If the market direction cannot move higher why pay for stock prices at this level when they can be bought for less.
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 and the sell signal is rising meaning it is getting stronger.
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 turned negative today. The drop was only slight, but it shows the growing number of investors who are moving their bids lower and pulling more capital from stocks.
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 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. It too is not overbought.
Market Direction Outlook And Strategy for May 21 2014
The first thing to say has to be that on a day like today with little news, it didn’t take much to get investors selling. The problem though remains that the market is grinding higher but it is continually being sold against. On Jan 2 the S&P closed at 1831.98 and today it closed at 1872.83 for a gain of just 2.2%. If you are into buying stock and hoping it will move higher in value, this is not the market to do that in. This is a traders market. A gain for just 2.2% is just a terrible return considering the risk to capital. The number of down days this year continues to grow. Looking at the chart below you can see that the number of days of selling represented by red candlesticks is about 50%. The sideways market is not meant for stock holding. It is meant for trading.
At the same time this is not a market for speculative trades. This is the type of market where if you are trading you want to stay in stocks that have strength and even if they pull back in a correction, they will quickly recover. While the market can keep churning sideways for a few more weeks, the problem remains that the small cap and NASDAQ indexes must recover. Otherwise there will be no sustained new highs.
My strategy is still the same, but I have a lot of capital sitting on the sidelines. I would rather earn far less and keep capital aside waiting for clearer signals. For Wednesday the technical indicators are heavily weighted to the downside.
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