The outlook for Friday was for the weakness in stocks and the bounce to continue. Thursday as you might recall, saw the market plunge to 1926.03 and then stage an impressive rally that saw the S&P recover all the losses for the day. It was obvious that the momentum from Thursday’s remarkable recovery should continue into Friday as long as the employment numbers were decent, which they were. Friday then saw the S&P move up 21.73 points or 1.12%.
SPX Market Direction Two Month Chart
That meant on Friday the decline the latest all-time high was just 2.5%. As well the decline on Thursday which pushed the SPX deeply below the 100 day EMA was seen by many analysts as a “washout” sell day from the past two weeks of declines. In other words, many investors looked at Thursday as a day to “get back into stocks”. Friday’s move higher seems to have confirmed that outlook for most analysts. Last week the bearish sentiment had risen to 59% among analysts so perhaps that also had something to do with the key reversal day on Thursday. What we can see in the chart below is that as of Friday, the SPX is now back above the 100 day EMA and almost ready to challenge the 50 day SMA which is sitting around 1975.
Market Direction outlook as of Oct 3 2014
Advance Declines For Oct 3 2014
Volume really fell off on Friday. Just 3.57 billion shares were traded. The most telling stats though were the number of new lows which dropped from 253 to just 79 while new highs jumped from 11 to 30.
Volume was 69% to the upside and 65% of all stocks were advancing. Friday may indeed have been an indication of a very strong bounce or it may indicate that Thursday was indeed a key reversal day. Monday will tell investors which way the market will be moving next, but Friday was definitely bullish.
Market Direction Closings For Oct 3 2014
The S&P closed at 1967.90 up 21.73. The Dow closed at 17,009.69 up 208.64. The NASDAQ closed at 4475.62 up 45.43.
Market Direction Technical Indicators At The Close of Oct 3 2014
Let’s review the market direction technical indicators at the close of Oct 3 2014 on the S&P 500 and view the market direction outlook for Oct 6 2014.
Market Direction Technical Analysis for Oct 3 2014
Stock Chart Comments: Friday’s action pushed the SPX back above the 100 day EMA and set it up to try to challenge the 50 day SMA. Again, the market needs to show some follow through on Friday’s rally. Following through has not been the strong point for this market since the start of the year..
1994 Support: The 1994 level is now resistance.
1975, 1956 Support: Both are light resistance. 1956 was easily retaken on Friday.
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. If the market direction should pullback on Monday we could eventually see a test of the 1870 support level either late in the week or in the upcoming 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 on Friday.
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 is negative but moved higher on Friday.
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 positive on Friday.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change was negative but moving higher on Friday..
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 an up signal 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 up at the close on Friday.
Market Direction Outlook And Strategy for Oct 6 2014
What the market needs to see on Monday is follow through to the upside. We might get this, but it is something that has eluded stocks this entire year. All the big up days have not shown follow through. Monday then could be lower which seems to be typical for this market.
With the technical indicators, all of them are moving to the upside although only two are actually positive. However the rest of the technical indicators are turning back up which could be indicative of a bounce still higher in the works.
For Monday two of the stronger indicators are bullish including the Fast Stochastic and the Ultimate Oscillator. With this pullback in stocks now down just 2.5%, this pullback has turned into just a slight dip. However I still believe that technically the market is reflecting continued weakness which we will see on Monday.
For Monday then, my market direction outlook is for stocks to move sideways with a slight bias to the upside, but just slight. I do think we will see some selling at the open on Monday and then additional buying. The most important aspect of the market for Monday will be whether there is any follow through upward momentum left from Friday. That will be important for the market to continue to claw its way higher. Otherwise the rally could end on Monday and stocks would move back lower on Tuesday..
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