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Market Direction Outlook For Oct 1 2014 – Sideways and Weak – Bounce Always Possible

Sep 30, 2014 | Stock Market Outlook

The Market Direction outlook for Tuesday was for a possible bounce but eventually a lower close. The rally that started on Friday should have continued into Monday, in my opinion and then sold back late in the day. Instead, investors started this week by dumping shares deeply and then pushing back late in the day. Today the market direction drifted sideways with investors concerned by annual home growth which showed the slowest pace since 2012 and comments by Shiller that existing home sales were continuing to show a lack of conviction among buyers which is keeping home prices from rising in many cities.

European news was no better with German jobless data showing no growth and inflation at a 5 year low. The sanctions with Russia continue to erode confidence in the European economy rebounded this year.

Meanwhile the Chicago PMI numbers pulled back a bit but showed inventories were at the highest pace in 41 years. (yes 41 years). Investors were divided on that news with some believing the rise in inventories showed confidence among business in the future and others surprised that inventories are continuing to climb when stats seem to point to people spending money which should have driven inventories lower.

Then the consumer confidence numbers came out and fell in September marking the first decline in 5 months. Many analysts then look at the rising inventory numbers as a negative for the economy.

SPX Market Direction Intraday Sept 30 2014

The intraday one minute chart below shows the erratic day the SPX encountered on Tuesday. The morning selloff almost hit 1970 and then the market climbed right back to finally reach 1985 by mid-morning. From there a jagged sell-off occurred with the SPX breaking through 1970 in the mid-afternoon. That sparked a small rally but the lack of buyers couldn’t sustain much of a rally and the market ended down at 1972.29 into the close.

You can see in the chart that 1975 continues to be tested as investors are using that level for trading purposes. When stocks falls below 1975 volume picks up, but as stocks move higher above 1975, volume dries up.

SPX Intraday for Sept 30 2014

SPX Intraday for Sept 30 2014

Advance Declines For Sept 30 2014

Volume was better by almost a billion shares with 3.95 billion shares traded. Of that volume traded 70% was down and 61% of all issues were declining. New lows jumped to 189, one of the highest readings to date. New highs were up to 31. Again the advance decline ratio is advising investors to be cautious here and wait for clearer signals before risking new capital.

As well it is important to understand that the number of new lows is showing that many investors are moving money to the sidelines in anticipation of further declines. The so-called smart money is betting on further declines which depending on how you look at the market could be a contrarian reading.

Contrarian – Latest Poll Supports Bulls

The latest poll now shows bearish is at 59% of analysts and just 18% are bullish. For the contrarian this is advising that stocks do not have much further to fall. While I tend to believe that the majority are never right, in September 2008 after Lehman Brothers collapsed the number of bears was 80% and they were correct. Obviously then being a contrarian was incorrect at that time. Nothing is ever fool-proof as we saw in March 2009 when 70% of analysts were bearish which was incorrect as early March marked the start of the great bull market we are in now, so contrarians were correct that time.

Market Direction Closings For Sept 30 2014

The S&P closed at 1972.29 down 5.51. The Dow closed at 17,042.90 down 28.32. The NASDAQ closed at 4,493.39 down 12.46.

Market Direction Technical Indicators At The Close of Sept 30 2014

Let’s review the market direction technical indicators at the close of Sept 30 2014 on the S&P 500 and view the market direction outlook for Oct 1 2014.

Market Direction Technical Analysis for Oct 01 2014

Market Direction Technical Analysis for Oct 01 2014

Stock Chart Comments: The most significant event today was the market not making a new low. Yesterday the SPX made a new low for this period of weakness. Today investors continued to unload shares but there were also those who were buying in the periods of weakness. They were not however chasing stocks higher but content to pick up shares primarily when the SPX was below 1975. .

1994 Support: The 1994 level has been retested numerous times over the past two and a half weeks and after having been broken through last week, it is now resistance.

1990 Level: This is light support which broke easily on Thursday last week.

1975, 1956 Support: Both are light support. 1975 is the more significant valuation at this point and was traded around throughout today.

1930 Support: Light support is found at 1930.

Strong Support Levels are at 1870 and 1840 (no longer shown). At present I am not expecting any break of either of these levels but the Bollinger Bands Squeeze that is developing could be strong enough to break through the 1870 level as the week unfolds. The strength of the decline today makes it quite possible the 1870 level will be reached which would mark a further 5% correction from today’s close.

The other two support levels not shown in the chart above are 1775 and 1750. I have explained that these two are critical support for the present bull market. While 1775 is important, it is 1750 that is now the bottom line.

A break of 1750 would mark a severe correction of more than 13% from the most recent high. This would be the biggest correction since April 2012. A pull-back of that size would definitely stun investors at this point and it is not something I am anticipating as there are no signs of any impending correction of that magnitude.

Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum remained negative today.

MACD Histogram: 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 confirmed sell signal on Sept 10. MACD continued to strengthen to the downside today.

Ultimate Oscillator: 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 was negative again today but is hanging near positive with a reading of 47.99.

Rate of Change: Rate Of Change is set for a 21 period. The rate of change was negative and continued to fall today.

Slow Stochastic: For the Slow Stochastic I use the K period of 14 and D period of 3. As the Slow Stochastic tries to predict the market direction further out than just one day. The Slow Stochastic is giving a week signal up for stocks. This could be signaling that the end of the week will see stocks move back higher.

Fast Stochastic: 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 down but was close to giving a buy signal at the close yesterday. The selling today has stopped that buy signal and kept the Fast Stochastic signaling down for stocks.

Market Direction Outlook And Strategy for Oct 1 2014

September has once again gone into the history books as another losing month. Since 1950, September has been among the worst months for stocks and this year ended up being no different. However the decline was just 29.99 points for a meager 1.5% loss. This is not much of a loss for the month and indeed the market is up 126.43 points from Jan 2nd’s open of 1845.86. This still represents a gain of 6.8% for the year.

October on the other hand has a somewhat shady past as more stock market crashes have occurred in October than any other month of the year. At the same time October is also the last of the notorious worst 6 months of the year. So while investors may be nervous entering October, it is not the worst month of the year and historically October has seen rising markets in midterm election years.

No matter how you look at October, selloffs in October have always been great times to buy stocks for superior gains in future months.

Technically the indicators are still showing the SPX as being oversold. While the Rate Of Change is not showing tomorrow as a day of change for the overall market direction, the Slow Stochastic is advising that a change may be in the works for the S&P. However as it is always best to follow the technical indicators and leave speculation aside, the technical indicators are showing more sideways action and more weakness for Wednesday but a bounce is always possible now. The fact that the S&P is now trending sideways away from the Lower Bollinger Band could be the signal that a bottom, even a temporary one, is being put in place.

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