The market direction outlook for July 2 was for the S&P 500 to try once more to break through the 50 day moving average but again fail and then turn lower. This is exactly what happened today. The move lower though started yesterday, not today. Instead today was a continuation of yesterday’s failure to break through the 50 day moving average. This evening following the market’s close I want to review three different charts to see if we can get a better picture of what is happening with market direction and where the S&P 500 and stocks may be headed.
Market Direction and the S&P 500
There are a number of significant aspects to consider with market direction when looking at the past 5 days of the S&P 500. I have marked the key aspects in the chart below.
Point A: The S&P 500 has been exhibiting big gap opens and then an inability to capitalize on the morning jump. Instead after the big gap open, often the market direction turns stagnant and churns sideways with a bias toward the downside. In other words, big jump open, sideways and then churn and failing to hold onto the opening gains.
Point B. Until yesterday, the S&P 500 was exhibiting the higher highs which is often a sign that the market direction wants to push higher. Instead today (July 2 2013) the market direction bounced up at the open, but when it failed to make a new higher high, it sold off. This is a bearish signal.
Point C. Lower lows has NOT been exhibited over the past 5 days but instead even today, the market direction ended with a slightly higher low. This is a bullish signal.
1600 still marks the line to be watching. Today in the selling, the market direction on the S&P 500 managed to fall back to 1607, just 7 points from breaking below 1600 again. A close below 1600 at this point would confirm that this is a trap for investors who have been buying with a belief stocks are moving higher. At the same time the lower highs from today are being countered by higher lows including today’s.
50 Day S&P 500 Moving Average
The most troubling part of the S&P 500 at this moment is the inability to break through the 50 day moving average and close above it. In the chart below you can see that the 50 day moving average is becoming quite the barrier. If you recall my earlier market direction outlooks you can recall that there is not a lot of support for the S&P 500 at 1600 so the markets inability to break the 50 day moving average means the 1600 valuation will not hold. The market cannot stay at this level for much longer.
Market Direction Candlestick
Today’s closing candlestick is what is known as a bearish harami cross. To not delve too deep, suffice to say that this candlestick is a signal that the market direction trend up is about to change primarily because of heavy indecision on the part of investors.
You can see this candlestick in the chart below on the final day in the chart which is July 2 (today). This is very bearish for the market being able to climb higher.
But Market Direction Has Fooled Investors in 2013
The problem though is two-fold. First, in the past, when this bearish harami cross has been formed, the market direction instead of falling has suddenly punched higher. This has been a common occurrence in 2013. Second is that the put-call ratio heavily favors puts. There are far more investors holding puts on this market than calls and rarely is the majority right.
Dow Market Direction Chart
Just to add to our confusion, let’s review the past 5 days of the Dow Index and its market direction. Again I have marked the key aspects in the chart below.
Point A. You can see the same problem with this market. Big gap opens higher on most up days for market direction has not seen any follow through during the day. Instead the market direction is exactly the same as on the S&P 500. Big gap open, move sideways and a slight bias lower toward the end of the day.
The other point I have marked is 15000 on the Dow which if you recall from earlier market direction articles, marks a tough area for the Dow to move easily past. The Dow has since the collapse in 2008, has a tough time with these big round numbers, like 10,000, 11,000, 12,000 and so on. For whatever reason investors are skittish around these valuations and tend to sell positions, content to be trading around those round numbers. Why is anyone’s guess, but it is very common since the fall of 2008. Today once again the market direction in the Dow fell back below 15000. You can see in the 5 day chart below how often the market direction has tumbled below 15000 and rallied above only to fall back again. This is anything but bullish for stocks.
IWM Russell 2000 Market Direction Chart
Finally, if we look at the Russell 2000 which represents 2000 of America’s finest mid to small cap stocks, you can see that throughout much of June the IWM ETF remains fairly positive as far as the 10 – 20 – 30 moving average strategy is concerned. The 10 period moving average has stayed above the 20 and 30 period moving averages for much of June. But three trading days ago the 10 period crossed over and down the 20 and 30 period moving averages. According to the strategy this marks a downturn for IWM. This is another bearish signal.
Too Many Market Direction Bears
The biggest problem though for the bears is there are too many of them. The majority of analysts have remained bearish since the market commenced its pull back with Fed Chairman Bernanke’s comments on scaling back Quantitative Easing. It is extremely rare when the majority of investors are right. This is one point against the bears.
Too Big A Return in 2013
However one of the biggest points against the bulls is that the market direction is already up over 13% this year which marks an excellent return but often the most return investors could realize in a year. Indeed 13% to 15% gains this year are outstanding so it seems implausible that stocks would move up another 10 to 15 percent from here. Indeed if you look at the chart of the S&P 500, you will be surprised at how rare it is when returns greater than 20% occur in a single year. Therefore stocks could very well be ahead of themselves and need to pull back to gather more support.
Market Direction Closing For July 2 2013
The S&P 500 closed at 1,614.08 down just 0.88 and the Dow closed at 14,932.41 down 42.55. The NASDAQ closed at 3,433.40 down just 1.09.
Market Direction Technical Indicators At The Close of July 2 2013
Let’s review the market direction technical indicators at the close of July 2 2013 on the S&P 500 and view the market direction outlook for July 3 2013 which is a short trading day with stocks stopping trading at 1:00 PM.
For Momentum I am using the 10 period. Momentum remains negative and this is becoming a concern. Momentum has refused to support the present rally which is bearish for stocks being able to regain further lost ground.
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 May 24. The sell signal is still active more than a month later but MACD is continuing to rise.
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 back negative.
Rate Of Change is set for a 21 period. The rate of change is negative for the 16th day which is reaching into the record book still.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the market direction is up.
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 indicating that the market direction is up.
Market Direction Outlook And Strategy for July 3 2013 – short day
Tomorrow is a short trading day due to the US holiday on Thursday. This could help account for the lack of buying today and the market swings. I did one Spy Put Options trade today which was quite good, but at the same time there are growing concerns for the market direction being able to maintain the present course. It is rare when the market direction keeps bouncing up against resistance at the 50 day moving average and does not eventually pull back to seek stronger support from investors.
Indeed even the Slow Stochastic which is indicating market direction up, is more neutral than truly up in its signal. Momentum remains stubbornly non-supportive of the market direction rally back which is another worrisome sign.
But I still keep looking at the number of bearish investors and I know from experience that it is rare when the majority of investors are right. At present the majority is bearish which is bullish for stocks. The continued rise of the US dollar is also not bullish for stocks.
My outlook for Wednesday then is for a possible flat market with a bias to the downside for stocks. Friday is the employment numbers and that will be significant for the market direction. Meanwhile though I am still watching for Put Selling opportunities here and there and taking small positions. I realize the market direction is getting weaker but I am selling puts against stocks I would own. I am though making sure that I am Put Selling far enough out of the money that I have a fair amount of confidence that even if the market direction should drop I will have plenty of time to buy back and where necessary, roll down those puts I have sold.
The outlook as you can see from the above charts is not overly bearish but it is not bullish either. This could mean we are entering a range bound market which could stay with investors for much of the summer. Personally I favor the bearish side of the market direction at present, but this market exhibits strong bullishness which cannot be discounted. Staying short this market means using stops to protect in the event the market direction runs back higher.
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