The Market Direction for Friday was “My bet is on another attempt to push above 1870 and hold above it for Friday into the close”, which is what investors saw on Friday.Volume fell back on Friday but was still decent at 4.4 billion shares traded but the new highs and new lows told investors a different story. Meanwhile most of the rally can be attributed to two different factors, the steep oversold condition of the market following days of triple digit losses and the comments by Fed President Bullard on the “possibility” of extending Quantitative Easing.
On top were housing starts and permits which rose in September fueling economic expansion speculation among analysts which would actually seem to disagree about the need for Quantitative Easing to be extended. My personal view is the same one I have expressed for months – that the market was overvalued and Quantitative Easing’s halt would result in a correction or certainly a large dip in valuations. Why the Fed decided for October to be the month is anyone’s guess but personally I would not have picked one of the “scariest” of months for equity investors as the month to end Quantitative Easing. Instead I could not understand why it was truly not just tapered month after month until it was less than a couple of billion and then gone. At some point Quantitative Easing must end, investors all understand that, but equities are emotional investments for probably 90 percent of investors, big and small and as such you would think there would be more thinking involved when pulling liquidity back from an economy where equities are so overvalued. Following that rant, let’s take a look at Friday’s action.
SPX Market Direction Intraday 1 Minute Chart
On Thursday stocks had closed at 1862.76 bouncing strongly off support at 1840 and briefly in the early afternoon breaking through 1870 to settle just below that support line.
SPX intraday for Thursday Oct 16 2014
On Friday stocks immediately pushed beyond 1870 to start the day which signaled the resumption of the recovery rally. By the start of lunch hour the SPX was at the highest level for the day nearing 1900. The remainder of the day stocks wandered lower but stayed well away from the 1870 support level moving sideways into the close by managing to stay just below 1890 at 1886.76. This places the SPX just below the 1905 resistance level which was the low from the August decline.
SPX intraday for Friday Oct 17 2014
Advance Declines For Oct 17 2014
Wednesday was one of the highest volume days this year with more than 6.1 billion shares traded. On Thursday that volume dropped off to a still strong 5.07 billion shares traded. On Friday volume fell further down to 4.4 billion which is still a good day but closer to what is expected on a normal daily basis.
However which 64% of stocks were advancing 34% were declining. The number of new lows however really plunged, falling to just 23 versus Thursday’s 176 and certainly Wednesday’s 594 which was the highest level in 2014. New highs moved to 37 versus Thursday’s 21.
The number of new highs versus new lows indicate the beginning of profit taking in this rally. The drop back of volume also indicates that many investors bought on Wednesday and Thursday and are now starting to take profits.
Market Direction Closings For Oct 17 2014
The S&P closed at 1886.76 up 24. The Dow closed at 16,380.41 up 263.17. The NASDAQ closed at 4258.44 up 41.05. All the major indexes had good advances on Friday however the Russell 2000 was a different tale.
After closing up on Thursday from the lowest level in a year at $103.86 on Oct 13 on the IWM ETF, the IWM ETF closed down on Friday at $107.48, slipping below the important $108 support level. The IWM ETF was as high as $109.22 earlier in the day. While definitely many investors were taking profits after the drop to a new low on Oct 13, this could be the start of weakness entering stocks once again.
Market Direction Technical Indicators At The Close of Oct 17 2014
Let’s review the market direction technical indicators at the close of Oct 17 2014 on the S&P 500 and view the market direction outlook for Oct 20 2014.
Market Direction Technical Analysis for Oct 17 2014
Stock Chart Comments: The most important events today was the recovery continued and held above 1870 and nearing 1905 and that the 20 day simple moving average (SMA) did cross down and below the 100 day EMA signaling there is a distinct possibility stocks will continue to slide lower shortly.
Strong Support Levels are at 1870 and 1840. Both levels are strong enough to delay the market falling. Today the market managed to once again hold stocks above the 1840 and 1870 levels.
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 at this time. That however could change if the selling intensifies. The two-day rally is nearing resistance at 1905 which is the low from the August dip.
The SPX is still below the 200 day EMA.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is negative and extremely oversold.
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 sell signal on Sept 10. MACD is negative and extremely oversold.
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 negative but no longer oversold and is continuing to rise.
Rate of Change: Rate Of Change is set for a 21 period. Today the rate of change is still oversold but is turning up. The change of trend signal is in place but it is weak and cannot be trusted at this point. More confirmation of the change of trend has to be received.
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 market direction is up and it had issued a buy signal on Wednesday.
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 still signaling up and it too had a buy signal on Wednesday.
Market Direction Outlook And Strategy for Oct 20 2014
Stocks are once again at a pivotal moment. Everything continues to point to this being a bounce. A lot of the bounce was orchestrated by the comments from St Louis Fed President James Bullard about a possible extension of the Quantitative Easing programs. At present the market must overcome the resistance level at 1905 which is the low from the August pullback and near the 200 day exponential moving average (EMA). At present all indicators continue to point to weakness for stocks.
To be long at this point an investor has to ask what has changed between the start of the sell-off and the present to compel investors to believe valuations on the way back up can sustain new highs. Quarterly revenue while decent has many larger companies pointing to further weakness in revenue numbers which fits in well with the argument that the global economies as a whole are slowing and the US will experience some slow down shortly. On the other hand housing permits, consumer confidence and unemployment all point to the economy continuing to grow and recover. This though has to be one of the longest recoveries in history as we are now nearing the end of 2014 and economist still talk about the “ongoing recovery”. In prior bear markets, recoveries from recessions were swifter and more compelling. This recovery is sluggish with continual conflicting signals. We may in fact enter another recession up ahead without ever truly emerging from the present one.
Rebound Rally – Day 3 – UpHill Battle
Everything points to the rebound rally coming to an end either Monday or Tuesday. That does not mean an immediate move back lower but it does mean the easy part of the rally is over. Investors must now prove they have conviction in stocks and with the 1905 level looming ahead marking strong resistance for stocks, it is questionable if the rally has staying power. Above 1905 a lot of investors will want to get out who failed to do so in the latest plunge. This will change to an “UpHill Battle” for stocks as basically stocks will once more push into overvaluation since the plunge has only started to return stocks to fair valuation levels.
Monday then is pivotal. It will be the start of what I am expecting to be an UpHill Battle for investors. I am expecting a volatile day with weakness at the start and rallies throughout the day as investors jostle and set positions for either up or down. I am expecting a weak close on Monday but remember Yellen speaks this week and that could keep stocks above the important 1870 and 1840 levels for much of the week. This could be a highly profitable week for those investors using the Trading For Pennies Strategy. I will be using it a lot this week, certainly at the start.
For those who are new to the Trading For Pennies Strategy here are some links in the USA Members section that discuss this compelling strategy. This is not a strategy for conservative investors and definitely only for active investors but returns can be stunning and capital in use is small. If you need input on your pennies trades send me an email with your entry times outcome and I’ll be happy to offer whatever suggestions I can.
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