The outlook for Friday was for stocks to move lower. There was no other call for Friday as technically the reversal of the Fed’s rally on Thursday was extremely bearish technically and fundamentally for stocks. The decline of the Russell 2000 on Friday also reached a new 52 week low and continues to point to lower prices to start the new week. As well, the VIX Index on Friday closed at its highest level since February indicating growing volatility as investors head for the exits.
SPX Market Direction Intraday Chart
The intraday chart on Friday is interesting to review. The first rally from the open pushed stocks back above 1930, which technically is light support for stocks. Once that 1930 level broke shortly after, the SPX made its first low of the morning. About an hour later the market made a second low which was higher than the first low. This seemed to bring in some investors who perhaps expected the SPX would push back higher. A second rally high over the lunch hour though was lower although it still did break through 1930. From there stocks moved lower and then in the last two hours, selling was relentless as the index plunged lower breaking through to close just above 1900 or the 200 day exponential moving average (EMA) at 1906.13. All in all, a very bearish day.
Market Direction Intraday for Oct 10 2014
Advance Declines For Oct 10 2014
Volume was heavy on Friday with more than 4.5 billion shares traded. 77% of all stocks were declining. There were a whopping 432 new 52 week lows and just 13 new highs. These figures show just how massive the selling was on Friday and yet the VIX Index closed at 21.24. Selling of this magnitude should have seen the VIX Index up around 24 or even 24.50. The market direction is definitely down as the bears were in full charge on Friday.
Market Direction Closings For Oct 10 2014
The S&P closed at 1906.13 down 22.08 and closing just above the 200 day moving average. The Dow closed at 16,544.10 down 115.15 giving back all the gains for the year and placing the Dow at the 200 day moving average. The NASDAQ closed at 4276.24 down 102.10 and at the 200 day moving average. The decline in the NASDAQ on Friday was pronounced and steady.
Market Direction Technical Indicators At The Close of Oct 10 2014
Let’s review the market direction technical indicators at the close of Oct 10 2014 on the S&P 500 and view the market direction outlook for Oct 13 2014.
Market Direction Technical Analysis for Oct 10 2014
Stock Chart Comments: On Friday selling intensified and the SPX closed just above the 200 day EMA, while both the Dow and the NASDAQ closed at their respective 200 day exponential moving average (EMA). Meanwhile a number of analysts called Friday’s action overdone and bordering on panic. They felt it was perhaps a washout. I doubt this as while the volume was high and the last hour and a half saw very strong selling, it will take more than a day to bounce this market back up.
1994 Support: The 1994 level is now resistance.
1975, 1956 Support: Both are resistance levels again.
1930 Support: Light support is found at 1930 but buckled under selling pressure. It is now resistance.
Strong Support Levels are at 1870 and 1840 (no longer shown). 1870 is a very likely target early this week.
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 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 and fell lower pushing into oversold readings.
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. The sell signal was definitely correct back on September 10. Any investor who bought the SDOW for example at the open on September 11 would have paid $25.03. On Friday SDOW closed at $26.68 for a gain of $1.65 or 6.5%. MACD is still negative and fell lower today pushing into oversold readings. With a drop of 6.5% in the SDOW which is a 3 times ETF, there is definitely more downside ahead before this correction ends..
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 is extremely oversold.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change is negative and now extremely oversold.
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 signaling down for the start of the week and is oversold.
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 for Monday and is extremely oversold.
Market Direction Outlook And Strategy for Oct 13 2014
Technical indicators are showing the stress of so much selling, especially on Thursday and Friday. Technical damage has been done to the market which will take more than a few days to repair before any kind of bounce can hold. The 200 day moving average could see a bounce and normally with readings this oversold and markets at the 200 day, investors should expect a bounce, but it will be an opportunity to add positions for more downside if there is a bounce back.
Selling will be dominant at the start of the week. I am using tight stops on my market direction trades and will buy back in on spikes up if they occur. Any rally at this point will be suspect and cannot hold. While stocks might seem like they are reaching into reasonable valuations, which some are, many are still overvalued and have further to fall. As they fall they will continue to pull the overall market lower.
Stocks like Procter and Gamble Stock (PG Stock) which on Friday closed up $1.03 or 1.23% at $84.69 set a new 52 week high but the stock is overvalued and with a rising US dollar, PG Stock earnings will probably be affected. Fair value in this stock is back below $81 and good value is below $79.
PG Stock for Oct 10 2014
There are many stocks like Procter and Gamble Stock (PG Stock) that are still way overvalued in my opinion and have yet to pullback to levels more in keeping with the current sell-off.
For Monday investors could see a rally off the 200 day but it will fail and the market will move lower before trying to make a more solid base. I am expecting 1870 will be reached this week and possibly 1850. Both of these are much stronger support levels and should stall the decline.
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