Market Direction – Getting Ready For A Bounce

Market direction at the close of today was very bearish. When the market direction is up and there are pullbacks in market direction buyers are always buying dips in the stock market. This is what turns around the stock market direction during periods of small daily pullbacks. These are not corrections but simply a stall in a continuing uptrend. Today at the close we saw the true nature of the present market as investors stepped in and pushed the market low at the end of the day. This is a very bearish indicator. Let’s look at the S&P 500 chart to see what I mean.

Market Direction End Of Day

At the close of the Market both on the S&P and the Dow Jones, buyers stepped in for a brief 6 minutes and then sellers took control and pushed the Market Direction steeply lower. This is not sign of an uptrending market that has stalled. But this also gives us a clue for what may be a nice trading opportunity.

Market Direction Action

Market Direction action at the close of Nov 8 2012

Market Direction Bounce

At the close of the markets today all three are exhibiting the same signals with varying degrees of differences. The most important signal at the close today were the Bollinger bands. Let’s look at what I saw at the close today and see what the Bollinger Bands are telling us. At the close of the day the Bollinger Bands were advising that we are probably going to see a stall in the selling and even possibly a bounce in Market Direction.

Here’s the signs:

A) When the Market Direction was in an uptrend the candlesticks were all hugging the Upper Bollinger Band.

B) A narrowing on the Bollinger Bands is almost always followed by a breakout up or down. At Point B you can see a narrowing in the Bollinger Bands.

C) The breakout came and the S&P candlesticks pushed away from the Lower Bollinger Band.

D) A typical move back to the Lower Bollinger Band was followed by the Market Direction trying to climb but going more sideways than up. The Market Direction then turned down and the S&P 500 fell back to the Lower Bollinger Band.

E) We are now at point E with the candlestick showing severely oversold and actually pushing through the Lower Bollinger Band. The market closed down and on the low at the close, but the low is at extremes which is almost always followed by a trend sideways with a bias to the upside.

Market Direction and Bollinger Bands

Market Direction and Bollinger Bands

Market Timing Technical Indicators For Nov 8 2012

The market timing technical indicators at the close of the market today support the notion that the Bollinger Bands are signaling a possible move sideways which should therefore see a pullback in the selling.

Momentum is still negative.

MACD is declining further following today’s continuation of selling.

The Ultimate Oscillator however is now oversold.

The Rate Of Change is still moving lower.

The Slow Stochastic is oversold but continue to point to lower (this is key)

The Fast Stochastic is extremely oversold with a K period reading of 0.00. You cannot get lower and this too is key.

Market Timing Indicators for Nov 8 2012

Market Timing Indicators for Nov 8 2012 agree with the Bollinger Bands.

Market Direction Outlook For Nov 9 2012

The Market Direction outlook then is for a bounce. The three strong key elements are:

1) Lower Bollinger Band has been violated and is starting to narrow. A sign that is normally followed by a push back to the upside or at the least, sideways.

2) The Fast Stochastic is extremely oversold and set to bounce back. The reading on the Fast Stochastic cannot get lower than this.

3) The Slow Stochastic is oversold but signaling that the market is still heading lower.

Combine all three indicators and I believe they are advising a bounce is in the works for Friday or Monday and the Slow Stochastic is advising us that the bounce will be short and the decline will then continue.

Trading Opportunity

This bounce in Market Direction will provide a nice trading opportunity. If the bounce can push back high enough to try to touch the 50 day moving average, I will be buying more Short Ultra ETFs for what I am sure will be followed by a move lower. The bounce may only last a few days at best or even one or two days but that may be all I need to put together another trade to ready myself for another leg lower in this correction.

For covered calls any push high enough could bring better covered call premiums allowing me to roll down some of the longer term stocks into in the money covered calls. Any bounce up will also allow me to buy to close some more naked puts to raise my cash levels higher.

I will be keeping a close eye on market direction at the open tomorrow to see if there is a bounce. If it comes, then the question will be, how high can it go. Personally I don’t think very high.