The market direction outlook for Friday was for stocks to move lower. With all the technical indicators starting to flash overbought signals as well as growing weakness, I had expected stocks to either trend sideways on Friday and end somewhat lower or basically move lower throughout the day. The rate of change I felt was signaling that stocks were about to change and move lower. This obviously was not the case.
There were primarily two key events that propelled stocks higher on Friday. The first was the ceasefire announcement from Ukraine which most believe will not hold, but the news of a possible de-escalation was still seen by investors as a good sign and a chance for Euro Nations not to impose further sanctions. Most analysts believe that further sanctions by the EU against Russia will increase the risk of a recession in Europe.
The second was the unemployment report which showed less jobs than expected were created. Analysts felt that this left room for the Federal Reserve to keep rates at historic lows. Both of these were catalysts to the upside.
SPX Market Direction Intraday Chart
Yesterday I showed the 8 day chart for the S&P. Today the S&P closed back above the 1994.85 level showing that the SPX is continuing to hold the recent lows in check.
You can see in Friday’s one minute chart that the initial response to the jobs numbers was negative. The market at the open broke through the 1994.85 level and then rebounded only to fall back again. By 11:00 AM though the outlook changed. As analysts began to unravel the employment numbers there was a growing consensus that the numbers were “poor enough” that it could keep the Federal Reserve plans for raising rates on hold a while longer. This brought in the “buy the dip” crowd and by 11:30 the SPX was back above the 1994.85 level and climbing. The remainder of the day saw the SPX rally right into the close. At 2007.71 the S&P closed at another new high.
Market Direction Intraday for Sept 5 2014
Advance Declines For Sept 5 2014
Volume moved down on Friday falling to 2.8 billion shares which is still below normal. Up volume made up 60% of the overall volume and just 95 new highs were made while new lows were steady at 29. New highs fell off on Friday but thin volume ahead of the weekend could have been the culprit. We will know more on Monday.
Market Direction Closings For Sept 5 2014
The S&P closed at 2007.71 up 10.06. The Dow closed at 17,137.36 up 67.78. The NASDAQ closed at 4582.90 up 20.61.
The Russell 2000 IWM ETF rose 37 cents to close at $116.38
Market Direction Technical Indicators At The Close of Sept 5 2014
Let’s review the market direction technical indicators at the close of Sept 5 2014 on the S&P 500 and view the market direction outlook for Sept 8 2014.
Market Direction Technical Analysis for Sept 5 2014
Stock Chart Comments: On Thursday at the close the market looked set to move lower. Only the rate of change was signaling a possible move higher. On Friday stocks moved to the upside but technically aside from the rate of change none of the indicators supported a move up. The move therefore was a result of geopolitical and economic events and not stocks themselves..
The most important aspect of the present market is still the 1975 level. However if the market direction breaks lower and pushed through 1990 then the chance of it falling to 1975 is high.
1975, 1956 Support: Both are light support and both may be tested in coming days but for the time being stocks look set to continue to move higher. 1975 is the more significant valuation at this point.
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.
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 12.7% 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 is positive but continued weak 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 buy signal on Friday August 15. MACD remains positive but the readings are continuing to pullback 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 is no longer overbought but was still positive and turning sharply back up.
Rate of Change: Rate Of Change is set for a 21 period. Today the Rate Of Change pulled back a bit but the reading is strongly positive and moving higher. The rise in the rate of change on Thursday usually has to be taken into context with the other indicators. On Thursday it was moving sharply higher. On Friday the Rate Of Change pushed still higher which negates the move lower indication and confirms a move up. The other indicators though must support such a move higher and in general they are more mixed than supportive.
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 lower. It remains extremely overbought.
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 changed its signal to up on Friday at the close and it is extremely overbought.
Market Direction Outlook And Strategy for Sept 8 2014
While a lot of analysts think we are seeing topping action in the indexes, what is important is the S&P holding the lower valuation. At present that would be the 1994 level. If it breaks and the market should head to 1990, that would signal a change in trend. I don’t think we are seeing a topping action just yet but it is true that the market index must break through and set new higher lows and then new higher highs. On Friday the market closed at another new all-time closing high. Now we need to see follow through this week.
Technically there are signs of the market weakening. The Slow Stochastic is signaling down but the other indicators are still positive and the Fast Stochastic is signaling back to up. Meanwhile the Rate Of Change is moving higher being supported technically by the Fast Stochastic on Friday. Part of the problem technical is the sideways action for the past several trading days. If you look at the two stochastic indicators you can see the continual tight readings between the two signal lines. This shows the extent that the market direction stuck. I added the Bollinger Bands this evening and you can see in their outlook that the Lower Bollinger Band is trending up. This often is a sign that the Bollinger Bands are moving toward a Bollinger Bands Squeeze. With the market above the Middle Bollinger Band we could see the market start to turn up higher.
There is still enough strength to keep the market rallying higher and for Monday while I am expecting some weakness, the market looks ready to try to make another new all-time high.
There is no change to my investing strategy at the present time and with the 1994 valuation holding the market from falling back, I see little to be concerned about in the market index at present. 1994 should be used by investors at this time as a pivot for trading purposes. Any move below it will turn my trades toward the downside.
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