For Tuesday I had expected the market to break through 1905 easily and close above 1910. Instead the market push higher was stronger thanks to the rumor of the ECB probably entering into their own bond buying program which would copy the Fed’s Quantitative Easing program (basically print euros). This grabbed the attention of investors who bought stocks and retook both 1905 and then moved to close above 1930. Today was a major move for stocks as two valuations of what should have been stronger resistance easily gave way.
The rumor mill grinding out news from the ECB held back sellers who are now waiting to see just how much higher the recovery can take stocks before selling out of their positions. The next hurdle for the SPX is 1956 and analysts now have turned from bearish to bullish on the SPX.
SPX Market Direction Recovery
The chart below shows the daily movement of the SPX from the high of Sept 19 to today’s close (Oct 21). The recovery has hit the 50% retracement and at 1941 at the close the market has recovered a total of 119 points or 58% of the loss. This has set the market up for a usual retracement of a correction but in this case the rumor out of the ECB may actually be enough to mark last Wednesday as the end of the correction and the start of another leg higher into the fall. We will have to wait and see the rest of this week.
SPX market direction recovery to Oct 21 2014
Advance Declines For Oct 21 2014
Volume picked up rising to 4 billion shares today an increase of 700 million shares. Obviously the ECB rumor was enough to bring buyers back to the market. Today 80% of all issues were advancing and new highs reached 65 while new lows came in at 24.
The advance decline ratio is showing renewed strength to the upside with more volume today and more of that volume to the upside. New highs are starting to rise although investors need to see numbers back in the 150 range to confirm a new uptrend is solidly in place.
Market Direction Closings For Oct 21 2014
The S&P closed at 1941.28 up 37.27. The Dow closed at 16,614.81 up 215.41. The NASDAQ closed at 4419.48 up 103.40.
The Russell 2000 IWM ETF closed up $1.79 or 1.65% to 110.53 marking the second day of strong gains.
Market Direction Technical Indicators At The Close of Oct 21 2014
Let’s review the market direction technical indicators at the close of Oct 21 2014 on the S&P 500 and view the market direction outlook for Oct 22 2014.
Market Direction Technical Analysis for Oct 21 2014
Stock Chart Comments: The most important event today was the reaction from investors to the rumor of ECB Quantitative Easing possibilities. This pushed the SPX above 1930 to close at the 1941 level. The 20 day SMA is turning back up and while it is still below the 100 day EMA it shows little chance of falling lower. The SPX stopped today at the 100 day EMA. The Dow pushed strongly up after being hindered yesterday by the fall of IBM.
Strong Support Levels are at 1870 and 1840. Both levels are strong enough to delay the market falling. 1930 was retaken today and is now light support. The next level of resistance is 1956 for the SPX.
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.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is positive and today’s move ended any oversold momentum.
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 but is rising rapidly. A buy signal could be issued by Wednesday or Thursday if momentum continues to climb.
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 positive and now overbought.
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 remains in place and is continuing gaining momentum. The signal is definitely for higher valuations.
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 of last week.
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 of last week.
Market Direction Outlook And Strategy for Oct 22 2014
The uphill battle continued on Tuesday but stocks had a lot of help out of the ECB rumor mill. Stocks have recovered 58% of the decline signaling that while this could be a bounce, there are growing indications that investors are determined to push valuations back higher.
Tuesday was a pivotal day but the ECB rumor juiced the market once again. Volume rather than subsiding, picked up after the morning and more than 700 million additional shares were traded today with 80% to the upside. The momentum to the upside is growing from buyers, not declining.
For Wednesday I am expecting a bit more upside in the morning but then a tapering off in the afternoon unless more rumors or news supporting the rally is released. Technically whereas a lot of damage was done in the recent correction, manipulation from both the Fed and then the ECB put in place another “stop” on further selling. The question still though remains if stocks continue to climb higher, the same overvalued prices will return. Unless earnings can come in stronger than they have been, stocks will be back trading with higher than fair price to earnings ratios. That means investors will be back looking at an overextended market.
No matter whether stocks move higher or lower, the goal as an investor is still the same. Looking for reasonable value and earning income through trading at those levels. Trading the market trend up or down, even if my personal belief is contrary to what the market is showing me, is important. I learned a long time ago that fighting the trend and fighting the Fed was pointless. To earn exceptional profits meant trading with the trend and not against it.
Rebound Rally – Day 5 – UpHill Battle Over
The UpHill Battle I discussed prior is over for now. Stocks have performed amazingly well and recaptured 58% of the correction.
Yesterday I indicated that the rally had to hold 50% of the gains made to confirm it is a solid uptrend. Right now stocks look set to do just that. While Wednesday should see stocks under some selling pressure, stocks look set to stay above 1930 for tomorrow and challenge 1956 this week. We could therefore see a negative close on Wednesday but stocks have to pull back below 1930 to make this rally questionable and I don’t see that happening on Wednesday. The bias is more to the upside than down at this point in the rally.
Bears have been confounded by the recent gains and bulls look set to hold much of the recovery rally. For Wednesday I am expecting to do more Trading For Pennies strategy trades but today I also added quite a few put selling trades as well.
With the market now up 58% it must hold its recent gains in the face of stiffer resistance as it tries to climb still higher. This will be the test we have been waiting for.
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