The market direction outlook for Thursday was for stocks to move lower. It turned out to be an interesting day overall though with stocks falling in the morning and then climbing back into the afternoon only to fall once again into the close. Investors are still trying to decide which side of the tapering fence the Federal Reserve is on. At the same time the overbought condition of the market direction remains stubborn and it was the end of the month. Overall it was the best October in 3 years which once again shows that the perma-bears who called for a crash this October should realize that at present with are in a bull market. Before looking at some other stock news let’s take a quick look at the S&P 1 minute chart for today.
Market Direction S&P 500 Intraday For Oct 31 2013
The 1 minute chart of the S&P 500 below shows today’s action. Once again we had the early morning test for support. This test took the S&P all the way down from 1766 the early morning peak to 1755.72 around 10;30. This was a drop of almost 11 points. I have seen that kind of activity before in overbought markets and almost always they end with a return to the lows by the end of the day. The market direction then climbed back and pushed above 1768 but shortly before 3:00 the market direction started to drop. I had bought Spy Put Options in the climb. I figured if I was wrong with my intraday comments about a lower close then I didn’t mind losing a little bit with the Spy Put Options. But the market fell and closed just shy of the early morning low. The reason this happens is because the market is over extended to the downside in the morning. The rally back in the afternoon is almost always met with traders who are watching and waiting for a chance to get out. At 1768 with 3 previous tops in the afternoon, all of then after 2:00 which failed to break higher, the sellers arrived. The market direction up is so overbought you knew it had to fall.
Economic News for Oct 31 2013
A few things on the economic front that were of interest. The Weekly Initial Unemployment Insurance Claims came in today at 340,000 for the previous week which is back below 350,000. Those investors who follow this as a market timing signal know that historically when the weekly rate is below 350,000 its rare for the market to correct by very much. Stocks tend to stay bullish when the weekly rate is below 350,000 and falling.
The Chicago purchasing managers index rose to 65.9% in October which beat forecasts of 54.5% by a wider margin than most had expected. In fact the number was a strong surprise to the upside.
Market Direction Collapse of October 19 1987 – Black Monday
Yesterday I commented about the market direction collapse in 2008. Today I want to look at the collapse of Oct 1987 to see what warnings signs if any there were for investors before the Black Monday crash of 20.4% in the S&P on Oct 19. The S&P closed on Friday Oct 16 at $282.70 and fell to a low of $224.83 on Monday Oct 19. The Dow lost just over 22%.
The crash actually started in Hong Kong and then Europe before hitting the North American markets. The stock market crash of 1987 and the May 6 2010 “flash crash” are probably the closest thing to a black swan type event I have perhaps experienced. However even with the 1987 collapse there were warning signals although no one anticipated the extent of the one day plunge. I have marked the key points in the chart below.
A. The market direction was already lower in September and earlier in October. The market was unable to stay above the 50 day simple moving average (SMA) and in September it had broken down to the 100 day exponential moving average (EMA).
B. Point B shows the 100 day exponential moving average (EMA) .
C. Momentum has recovered somewhat in the week before the crash but it was already falling off quickly within days of point B.
D. Two days before the crash the S&P had already fallen fairly hard breaking through the 100 day exponential moving average (EMA) and pushing down to the 200 day exponential moving average (EMA) .
E. The market leading up to the crash tried to hold the 100 day EMA.
F. It then broke down to the 200 day EMA and the day before the crash it had fallen 17.4 points from the intraday high losing 5.8% and closing well below the 200 day moving average.
momentum from point C through to F had turned decidedly bearish which was another warning signal.
G. Last was MACD which had twice issued sell signals on the S&P 500.
So while for many investors 1987 seems like a bolt of lightening there were indeed many signals that the market direction was in trouble. The method to protect today would be to buy the ultra shorts as the S&P 500 moves toward the 200 day moving average. As well I also turn to selling in the money puts to help protect long-term stock positions and earn some income from any downturn. You can see then that even in 1987 there were many signals for those investors who were following them. The problem back then was the difficulty in protecting a portfolio from big down days. Calling a broker and placing a trade was incredibly difficult on such a day as the market was moving so quickly that orders were being dropped faster than they could be filled due to price gyrations. Today there are far better products and methods for handling profiting from such events.
Tomorrow I will look at the Flash Crash of May 2010.
Present Stock Market Direction
Once again I want to mention as I have done in the past two market direction articles, that at present there are no signs of such an impending crash in the market direction.
Advance Declines For Oct 31 2013
For the third day this week, decliners let advancers, and today decliners were once more far ahead with 59% of stocks declining and 38% advancing. Meanwhile 585 stocks set new highs and 128 new lows. The suspicion of the rally losing steam is being confirmed with declining new highs and a third day of decliners leading advancing issues.
Market Direction Closing For Oct 31 2013
The S&P 500 closed at 1,756.54 down 6.77 and now down 15.41 points in two days. The Dow closed at 15,545.75 down 73.01 points and now down 134.6 points in 2 days. The NASDAQ closed at 3,919.71 down 10.91. The IWM ETF closed down 0.64 or 0.58% which is better than yesterday’s drop of 1.37%. It closed the day at 109.19.
Market Direction Technical Indicators At The Close of Oct 31 2013
Let’s review the market direction technical indicators at the close of Oct 31 2013 on the S&P 500 and view the market direction outlook for Nov 1 2013.
For Momentum I am using the 10 period. Momentum is still positive but continued to decline today.
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 Oct 14. MACD has been declining since October 22. While the readings are still positive, they are rapidly eroding. he market could be on the verge of a sell signal either tomorrow or early next week.
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 lower today and no longer overbought.
Rate Of Change is set for a 21 period. The Rate Of Change is moving higher today but is still below Oct 28. In other words the rate of change while positive is showing pressure to the downside and an inability to climb higher. It is starting to reflect investor concern. Investors still want to buy stocks but not at higher prices.
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 and it is now just 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 for Friday is down and it too is now just overbought.
Market Direction Outlook And Strategy for Nov 1 2013
The first day of November has a history of being 60% lower over the past 10 years. Investors who have been in this latest rally were looking for a reason to sell some of their positions and raise some cash. It seems like the Fed statement has provided them with that catalyst. The failure of today’s rally attempt shows how tired the market direction up is, how overbought and how over extended it is. The market direction could try to bounce back during the day tomorrow but I believe it will fail. The key to watch now is 1750 on the S&P 500. More on that tomorrow in my intraday comments.
For tomorrow then I am siding with the stochastic indicators and think the market direction will move lower again.
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