The market direction outlook for Tuesday was for stocks to be weak in the morning but then move higher into the afternoon and close. That didn’t happen as the economic news shook investors. The news that the global economy itself may be slowing bothered investors as did the news that China continues to slow. The biggest news though was that the US economy probably contracted in the first quarter for the first time in three years and the second time since mid-2009. Government sources quickly covered that the next quarterly report should show growth again but slowing growth means slowing revenue for corporations which ultimate means it will be difficult for stocks to move higher and stay higher.
The second problem for stocks is the continuing Ukrainian crisis. With events escalating investors are nervous and this also contributed to the decline in stocks today.
Market Direction S&P Intraday Chart May 6 2014
The one minute chart below from Tuesday’s action, shows the selling that took shape. In the morning the market opened lower and then attempted to stabilize. The problem was the market could not push back up beyond the opening high. That left the market vulnerable to selling lower. The morning low held on until just after the lunch hour. Twice in the morning the morning low broke but was pushed back up. After lunch though the selling intensified and the market fell lower in the afternoon, closing at the low for the day. This will help set up for a possible bounce attempt at the open and then more selling.
Advance Declines For May 6 2014
Advancing issues made up 30% of the volume and declining issues made up 66% as the market direction moved lower throughout the entire day. New highs were just 108 and new lows 87. While the new highs are still above new lows, the numbers are poor for any move higher. Momentum is rapidly fading from the direction up.
Market Direction Closings For May 6 2014
The S&P closed at 1867.72 down 16.94. The Dow closed at 16,401.02 down 129.53. The NASDAQ closed at 4080.76 down 57.30 or 1.38% the most among the big three indexes. The Russell 2000 ETF, IWM, closed down $1.82 for a drop of 1.63% to $110.07.
Market Direction Technical Indicators At The Close of May 6 2014
Let’s review the market direction technical indicators at the close of May 6 2014 on the S&P 500 and view the market direction outlook for May 7 2014.
The 1750 level continues to hold the S&P up since the correction ended in early February. All the levels of any support above 1800 have been broken and will need time to heal and create support again. Any downturn in stocks will quickly see these levels above 1800 break. The only level above 1800 that has any support worth mentioning is the 1840 level. There is still no change to this. I am still expecting that at some point in the spring to summer period stocks will correct down to the 1750 level. Today’s ease with which the S&P fell back through 1870 shows the lack of support. The outlook looks poor at present for stocks so I will not be surprised to find the S&P challenging the 1840 level within a couple of days. The sell-off today has moved the S&P back to close just above the 50 day SMA.
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 now negative and moving lower.
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 the readings show a quick drop. Another day of selling and MACD will be issuing a sell signal.
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 still positive but took quite the tumble today and fell to a reading of 54.40 at the close.
Rate Of Change is set for a 21 period. The rate of change is still positive with today’s selling indicating that some investors were taking advantage of today’s selling to put capital to work.
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 Wednesday. The Slow Stochastic indicates the market is still 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 had indicated that the market direction was up for Tuesday. Today that signal has changed to a sharp down outlook for Wednesday.
Market Direction Outlook And Strategy for May 7 2014
The technical indicators are still bullish, but all but one are showing lower readings. Today three indicators are signaling that Wednesday will see lower prices. All three indicators are momentum indicators. These are momentum, Slow Stochastic and Fast Stochastic. MACD and the Ultimate Oscillator are turning lower. Only the rate of change is moving higher indicating money was flowing into stocks during the selling.
The Market Direction outlook is obviously for stocks to move lower on Wednesday.
Momentum continues to be poor for stocks and the lack of significant numbers of new highs has been a problem for weeks. Revenue has been very disappointing this quarter with only about 2% of stocks beating estimates. Earnings on the other hand have been good, but it is revenue that will drive stocks higher and we are not seeing robust revenue growth. Finally add in the decline in the NASDAQ and stocks cannot push much higher without the NASDAQ joining in. The direction is changing to the downside.
I will be trading to the downside on Wednesday. I am expecting a short bounce attempt at the open and then selling for most of the day.
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