Originally when I wrote the market direction outlook for Tuesday the technical indicators were pointing to a sideways movement with the bias lower. That changed just after I posted when Putin decided to pull back his troops from “exercises”. This meant the outlook was “weakness cancelled by Putin”. In bull markets when the underlying trend is up, any catalyst to the downside can be quickly turned around. Often many investors who are trading to the downside get caught on the huge rally back. That’s what happened on Tuesday and I spent a lot of time with investors today who had put in place naked calls and other strategies thinking the downside was just starting. The same happens in bear markets where the general trend is down but a catalyst to the upside is suddenly turned back down catching many investors.
Always Trade With Knowledge Of The General Trend
This is why I indicated that all my positions based on trading the market direction down would be closed by the end of the day. It’s common on big catalyst down days like Monday for the direction to change the very next day. Today was a prime example. This is why it is important to earn profits from these events but always remain aware of the general trend which is up. Let’s take a look at the daily chart.
S&P Market Direction Intraday for March 4 2014
The one minute chart below shows the day’s action. At the open the market moved higher quickly. The second dip took the S&P to the 1866 to 1867 level. From there the market continued slightly higher and was heavily overbought. I wrote that I expected the market direction would pull back below the 1868 level and possibly down to 1864 on a dip. Shallow dips are common in bigt up days and the second morning dip down to around 1867 was a point I felt the market could dip to later in the day.
A dip did happen in the afternoon which allowed me an additional trade in the market direction portfolio. This happened in the mid-afternoon and from there the market direction pushed higher into the close. From just after the open until the close the S&P traded in record high territory. The market direction was incredibly overbought all day. Investors were very enthused and a lot of buy signals were triggered during the day.
Advance Declines For March 4 2014
The advance – decline numbers today tell the tale. 81% of issues advanced and only 17% declined. There were 307 new highs and 67 new lows. This is the highest number of new highs in months.
Market Direction Closings For March 4 2014
The S&P closed at 1873.91 up 28.18. The Dow closed at 16,395.88 up 227.85. The NASDAQ closed at 4351.97 up 74.67.
The Russell 2000 ETF IWM was the strongest of the indexes rising 2.52% to close at another all-time high at $119.83 after setting an intraday high of $120.58.
Market Direction Technical Indicators At The Close of March 4 2014
Let’s review the market direction technical indicators at the close of March 4 2014 on the S&P 500 and view the market direction outlook for March 5 2014.
The 1750 level is holding the S&P up. The past several days has seen support building at the 1840 level. Today’s move to 1873.91 at the close places the 1840 as the closest level of support.
For Momentum I am using the 10 period. Momentum has been the best indicator over the past two months, replacing MACD as the most accurate indicator. Momentum over the past several days had been declining but today momentum turned back up.
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 buy signal on Feb 11. MACD moved back up today.
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 moving into overbought territory.
Rate Of Change is set for a 21 period. The rate of change jumped dramatically today reflecting the heavy buying and investor enthusiasm. I would expect it to pull back tomorrow.
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 for Wednesday. It is the only signal that failed to climb back to positive readings today. It is still overbought.
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 that Wednesday will continue the rally and stocks will move higher. It is also overbought.
Market Direction Outlook And Strategy for March 6 2014
The rally on Tuesday was overdone but understandable. When markets react strongly like they did on Tuesday, it draws many investors in who fear being left out of a large rally. Remember the old saying “buy at the top, sell at the bottom”? This is typical investor behavior, following the market like a herd of sheep. I am not saying though that I believe the rally will fail, far from it. However it does matter to pay attention and learn from mistakes. Big up days are rarely the best time to put in place new positions. They are almost always the best time to trim positions. That said a lot of investors were busy buying today and indeed there were many buy signals generated by the market.
At the close of the day, analysts who just one day earlier were very bearish, suddenly became bulls. Many now are calling for the market to move to 2100 to as high as 2500 by the end of 2014. A lot of analysts believe that now stocks probably will not have any kind of significant pull back this year. Most felt a 5% correction this year would be all stocks will see.
How they come up with these predictions I can’t even guess. This is why I stay invested while always watching for trades that can protect my capital while at the same time earning profits. Put Selling and applying a variety of other strategies have served me well in every market I have been in since the early 1970’s. This market is really no different. The key to surviving unscathed is to not follow the herd but be aware of the herd. Today for example the over enthusiasm meant that trades done against market direction needed to favor the upside, but that there would be dips during the day to take advantage of which is what I did. Any day with a rally as big as today’s will always contain a number of dips which will be perfect for trading against. It is the same in bear markets where huge plunges will create opportunities as stocks roar back only to fall again.
Keeping An Eye On The Ukraine
While Putin seems to have pulled back, there were lots of rumors this evening about a missile testing and claims that Putin is not really backing down at all. Putin himself indicated that at the present time “there is no need to invade the Ukraine, yet”. The situation is still volatile and could change in a heartbeat. This is what investing in risky assets is all about. I cannot recall many years as easy as 2013 for profits. Most years are more like this year where events unfold that can punish investors as well as reward them.
For Wednesday I am expected consolidation and an attempt to move higher, but rumors may keep volatility up and cap any significant further advances. Instead I believe investors will sell the market a bit in the morning probably at the open and then look for the latest employment numbers to try to predict what the non-farm payroll numbers will look like this Friday.
At present the market direction is up, but just as Putin gave investors a reason to rally on Tuesday, he could easily give a reason to sell later this week.
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