The Fed Chairman’s news conference yesterday certainly caused sellers to enter today. The S&P 500 fell 2.5% in what turned out to be a fairly significant day as the sellers managed to break support at 1600 on the S&P 500. For investors who read my market direction columns, you will remember how I indicated that 1600 was the line in the sand so to speak for support. In my article “What Me Worry?” I commented that until 1600 broke I was unconcerned about the volatility. Today the S&P 500 fell to the 1600, bounced and then retested several times. Each time the S&P 500 tested the rally back was weaker and on thin volume. It was obvious that 1600 was going to break.
Market Direction Action For June 20 2013
You can see in the 3 month daily chart below that the 1600 level broke easily as the S&P 500 dropped below the 50 period moving average. Once the 1600 level broke the S&P quickly plunged almost to the 100 period exponential moving average (EMA). The next line of support from this year’s rally is at 1540.
Before discussing today’s action and the outlook further, let’s look at the market direction technical indicators.
Market Direction Closing For June 20 2013
The S&P 500 closed at 1,588.19 down 40.74 and the Dow closed at 14,758.32 down 353.87. The NASDAQ closed at 3,364.64 down 78.57.
Market Direction Technical Indicators At The Close of June 20 2013
Let’s review the market direction technical indicators at the close of June 20 2013 on the S&P 500 and view the market direction outlook for June 21 2013.
This evening after the close the market direction technical indicators are decidedly bearish.
For Momentum I am using the 10 period. Yesterday Momentum was on the second day of turning positive. Today it is definitely negative.
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 was starting to narrow until Bernanke’s news conference. Today the sell signal is strongly negative.
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 oversold.
Rate Of Change is set for a 21 period. The rate of change is negative for the eighth day and is back moving lower indicating a lack of conviction among buyers.
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 down and is reaching oversold.
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 lower and is extremely oversold.
Market Direction Outlook And Strategy for June 21 2013
Today was all about earning income from the down side move in market direction. I used the Spy Put Options to earn considerable returns and the market direction portfolio is also short the market. Meanwhile there are enough oversold signals that I won’t be surprised to see some buying at the outset tomorrow and a push back up. However it will fail even if it lasts for more than Friday which I am somewhat doubtful of. I believe any move higher to try to recover 1600 at this point is lost until the market direction moves lower and builds better support to push through 1600 again.
Meanwhile my Put Selling was on hold today while I wait to see if there are more signs that the downward move is over or at least slowing. Today was a steep down day but the market is so high after the Fed liquidity programs that the next few months the market direction may spend the next couple of months looking for normal valuations of stocks. This is still a bull market but the juicing by the Fed has pushed up valuations too high and despite what analysts have been feeding investors, stocks have been overvalued and much now return to normal levels.
I don’t think we will see the second level of support in the S&P around 1540 within the next couple of days but I do think the market will work its way there next week. For Friday the market direction technical indicators are showing a snap back rally may be in the works. It will be technical in nature, just a reaction to the oversold condition of the market. After that the market will move lower as we enter two very weak months, July and August.
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