Market Direction For Third Week Of November – Bounce Still On

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Market Direction this week was all down hill. One of the worst weeks for falling stocks since May but just as in any market there is always some place to make a profit. This week it was with the Spy Puts Trade, IWM ETF Trading For Pennies Strategy, rolling covered calls down and into the money and moving some of my put ladders further down and out in time. All of these made additional profits and my portfolio is nearing 30% for the year. This is far beyond my goal of 12%. I am holding very few stocks and I have raised my cash level to 40% of my entire portfolio. As I was already 30% in cash, I closed a number of out of the money puts for profits and raised another 10% in cash. Remember though, this is of my entire portfolio, not just the stock and option portfolio which you see here. With the markets now in a foul mood I am staying with my corrections and bears strategy which I outlined earlier this week in this article here.

Rolling Covered Calls Into The Money – Some Tips

This correction in market direction will provide some very decent returns, but again when rolling down covered calls for some protection you want to do this only during a bounce up and stay within a strike or two of where the underlying stock is trading. I like to stay out just a month at this point to give myself plenty of room and time to roll down if the correction gets a lot nastier or back up if a catalyst should emerge to push stocks convincingly back above the 50 day moving average.

Market Direction – Bounce Still In The Works?

Let’s start by looking at the NASDAQ market direction to see what today’s close is telling us for next week. The NASDAQ rose 9 points today and a lot of that rise has to be attributed to Apple Stock which rose 1.7 per cent as it rebounded from a deep sell off. Now down 23% from its high and down 8 percent in just the previous 3 days. Many analysts are sticking to their bullish outlook and are calling for Apple Stock to be at $760 by Christmas.

But the NASDAQ is the worst of the three US Indexes. Technology is not the place to be right now and actually hasn’t been since September 26 when MACD gave a clear sell signal on the NASDAQ index. Below is the NASDAQ market direction chart since September and you can see how it has been all downhill. But there are some good signs for a bounce next week.

First, there is a gap from three trading sessions ago which will be filled in the next rally. I believe resistance in the NASDAQ is right at 3011 which you can see in the chart below is a valuation that has been tested several times. The index is stuck right on the Lower Bollinger Band.

Candlestick Chart Analysis

The last two candlestick in the NASDAQ chart form what is known as a Bullish Harami Pattern. This is not very reliable but it often is accompanied by a bullish reversal. However the chance that this marks the bottom in the recent selling is very slim. I am not a big believer in candlestick chart analysis but it isn’t just the candlesticks that are advising of a bounce back in the NASDAQ.

NASDAQ Market Direction Nov 9 12

NASDAQ Market Direction Nov 9 12

Other Market Direction Bounce Indications

A) MACD Histogram is NOT signaling a market bounce but I have marked it so that investors understand that for any change in overall trend in the NASDAQ MACD must change to positive. The trend can turn sideways and MACD can acknowledge that but for investors to get bullish, MACD must turn back up. Since September 26 it has been negative.

B) The Ultimate Oscillator is oversold which is at some point going to be followed by a bounce. It can certainly become more oversold than it is reading right now, but generally this type of reading is followed by a more prolonged bounce than we saw today.

C) The Slow Stochastic is extremely oversold and while the signal is for stocks to be lower, the Slow Stochastic looks out over market direction beyond one or two days. Therefore it is often signaling that stocks will be lower later next week, but this does not mean stocks cannot bounce first and with an extreme oversold reading in the Slow Stochastic, this is pretty likely.

D) The Fast Stochastic is at extreme oversold levels and is set to bounce. The chance of the reading going lower is slim unless an unforeseen event occurs to push the NASDAQ market direction even lower. This is unlikely with a reading this low. Remember, this is not 2008. This is investors being concerned about the fiscal cliff not being addressed, the riots in Greece, continuing unemployment, a decline in earnings and today a new wrinkle, growth in China being better than expected meaning perhaps a withdrawal of some stimulus which has pushed stocks higher.

NASDAQ Outlook

The outlook for the NASDAQ is for a decent bounce to start the week. Whether it is Monday or Tuesday it doesn’t matter, but I would expect a couple of days at least and for the index to try to break 3011. That could end up being a great place to by ultra short ETFs against the NASDAQ, but I will have to reassess when that occurs.

The same image is seen for the Dow Jones and the S&P so I will just look at the broader S&P market.

Market Direction Outlook S&P 500

The first thing you notice from the S&P 500 market direction chart is that it has fared better than both the NASDAQ and the Dow. Yesterday it closed at the 200 day and today it fell below it but closed on it. There is still support for the S&P 500 at the 200 day.

Candlestick Chart Analysis

The last two candlestick in the S&P 500 match that of the NASDAQ chart. It is the same Bullish Harami Pattern. Again, it is not overly reliable indicator but often it is accompanied by a bullish reversal. It does not in my opinion mark a bottom in the selling but certainly it is a reversal indicator. I would expect a push could take the S&P 500 market direction back to the 50 day moving average which I doubt the index can break through.

Market Direction On S&P 500 For Nov 9 2012

Market Direction On S&P 500 For Nov 9 2012

MACD Market Direction Indicator

A) On the chart above I have marked the MACD indicator which since September 25 and 26 has been clear on the market direction being lower. When the bounce comes, the only way the bounce can reclaim market direction and move the markets higher is for MACD to climb back to positive. That is going to take some doing, so when the bounce comes, watch MACD for signs that the market direction has changed. I don’t think that is going to happen.

Other Market Direction Indicators

B) Ultimate Oscillator is oversold, just as it is on the other three indexes.

C) The Slow Stochastic indicates that the market direction is still lower but at K period at 5.5, it is extremely oversold and set to bounce. The signal being generated is the same as the other two markets and reflects more later in the week than at the outset. So there could be a bounce to start the week and then a return to selling later in the week.

D) The Fast Stochastic is also extremely oversold and should bounce.

Again the indicators are the same with the S&P as the NASDAQ and the Dow. It really looks like a bounce before more selling. The S&P could bounce back to the 50 day moving average and that is where I would be considering buying back into the ultra short ETFS which I unloaded in the late morning today when the market recovered from the early morning jitters.

I noted that William adjusted his market timing portfolio during the day but was not taken out.

Today’s Market Direction Action

There actually was a lot of activity today both in the market itself and out of it. The most interesting perhaps was all the talk about the fiscal cliff and then the President’s news conference which saw the Dow market direction tumble from around 60 points up into the red before recovering slightly. The fiscal mess definitely has to be dealt with but as an investor I cannot do anything to influence the outcome (and as a Canadian), so the better course is to look for opportunities and profit wherever possible.

There were also some interesting economic reports including the University of Michigan’s consumer sentiment index for November which rose to 84.9 from 82.6 in October which marked the fourth straight increase putting the index at its highest level since July 2007. Part of that increase is the time of year but it is also due to the housing marking starting to look like it may have finally bottomed. News out of China reported that retail sales rose 14.5 per cent in October, industrial production rose 9.6 per cent and inflation slowed to its slowest pace in 33 months, at 1.7 per cent. But this also concerned investors as any recovery in China could mean a withdrawing of liquidity from the Chinese economy.

Market Direction Outlook Summary

Next week I will be looking for a bounce and once I see how high I can put on more positions. For Put Selling, this morning I believe was probably the last best time for a couple of days. A lot of the puts I have in place could end up being closed is the S&P 500 can recover to the 50 day moving average. This will give me even more opportunity to put them back on once the markets pull back again toward the end of the week. I do not believe the selling is over, but it’s about time for a bounce.