Market Direction After Tuesday’s Plunge – Scared?

Market Direction on Tuesday was down all day. There was not big rally trying to get back to break-even on Monday’s close. I thought the Scary Pumpkin might describe how a lot of investors feel after today’s plunge. But remember that no market collapses overnight. This market is sitting near all time highs. I received a lot of emails wondering if I thought we could see 10% one day plunges by next week. I don’t think so. I do believe though that stocks must work their way back to being fairly valued. It could take some time, but I think they will get there and I am expecting lots of profit-making opportunities on the way down. In the members section I plan to keep a running commentary on what I am doing should the correction worsen. This way members can interact and perhaps we can all learn some tricks to beat a bear market.

4 stocks in particular dragged the Dow Index market direction lower by 100 points. These were Dupont Stock (DD) which fell 9% after announcing poorer earnings than analysts had estimated and indicating they would be letting 1500 workers go. Caterpillar stock (CAT) continued to decline falling another 1.76% after its lower than expected earnings Monday. 3M Stock (MMM) fell 4.1% also on lower than expected earnings. Chevron Stock (CVX) fell another 2.98% today following yesterday’s big decline again on lower than expected earnings. They were not alone with IBM Stock also reporting lower than expected earnings. All of this hit market direction hard and stocks opened with a gap down which was never recovered.

Market Direction And Earnings

Following the QE3 announcements by the Fed, many analysts had predicted lower than expected earnings for this quarter. Indeed many companies such as Intel announced earnings warnings in advance of today. While stocks like Intel stock did pull back, most investors seemed convinced that earnings would be better than analysts estimates and they pushed stocks higher. Weeks ago when the stock markets were flirting with setting new highs, many bullish analysts were of the opinion that the indexes would easily break through the latest market highs and push to new all time highs. There were a lot of calls for the S&P to close out the year between 1800 to 2000.

I wrote quite a number of articles pointing out that earnings would have to improve by 15% to drive stocks up and keep them up. I also discussed that PEs are historically high going forward and only earnings could bring PE’s back in line. Higher earnings would mean lower PE’s and stocks could therefore retain higher valuations.

The lower earnings out of the majority of the Dow 30 has a particular impact on the markets because these are the big international companies. Most of these companies in the Dow 30 have operations around the globe and if their earnings are slowing, then the globe itself is experiencing a slow down.

Overall then I believe today’s selling was investors realizing that earnings are going to disappoint and stocks will have to pull back to justifiable PE levels.

Market Direction Portfolio Goes Bearish

I see that Williams bought bear ETF’s today and obviously expects the market to fall a lot further. You can review all the changes including a number of stop-loss changes during the day through this Market Direction link.

Market Direction For The Rest of This Week

So what should investors expect for the rest of this week? Monday saw the Dow sell off 90 points and then rally back but analysts claim the rally was a lot of short covering. Whatever the case, today was all down from the start. I did 2 SPY PUT trades and 2 IWM Trading For Pennies Strategy trades. The most significant event now is that the markets broke through the 50 day moving averages after testing them a few times. The break today was decisive.

In the market direction article I wrote in the Members Section I discussed the break of the higher highs and higher lows which the market has made since June. These are significant technical events as is the breaking of the 50 day moving average.

Market Timing Technical Indicators

The market timing technical indicators at the close of today are bearish.

Momentum continues to move lower indicating sellers were heavy into the stock market today.

MACD (Moving Average Convergence / Divergence) which gave a sell signal on market direction on September 25 is more bearish than yesterday and more bearish than last week. According to MACD market direction will continue lower.

The Ultimate Oscillator is bearish but not yet oversold.

Rate of Change is negative which after today’s heavy selling is to be expected.

The Slow Stochastic remains bearish again today and as it looks out beyond more than a day or two to predict market direction , it is signaling that more downside is ahead for the market direction.

The Fast Stochastic remains bearish as well but with K period now at 8.75 it is deep into oversold. But with a D period of 39.51 there are still signs that the market direction has room to fall lower.

Market Timing Technical Indicators Oct 23 2012

Market Direction as determined by the market timing technical indicators is bearish

Market Direction Outlook for Wednesday Oct 24 2012

With all the technical indicators with bearish signals, the easiest course for stocks is to continue a move lower, but stocks are not rational and with so much selling today there could easily be a bounce tomorrow even if for just a short period in the morning. I have an investor friend who is heavily into Elliot Wave. I could never figure it out but he claims that this pullback should only last to 1393 as it is part of a wave 4. He went on to tell me this evening that there will be one more high into 2013 when the market will try to break the old highs and then he is expecting the bull market that started in 2009 to top out and a 50% retracement to begin. I must tell you though that on the weekend he told me that the markets were in the middle of wave 4 up and he called me Monday night to challenge my technical indicators that said more selling ahead.

This evening though he has changed his stance on market direction. I don’t hold a lot of value in Elliot Wave but I know a lot of investors do follow it so there you have it from one Elliot Wave investor. Another investor friend follows Candlestick Chart Analysis and he advised me on October 19 that the candlestick chart analysis had given a sell signal. He told me this evening that this sell signal remains.

Personally I think MACD has been the best and it issued a sell signal on September 25 and despite whatever the stock market threw at it, MACD remained with the sell signal on market direction.

Market Direction outlook then is for more selling ahead and for those who love to play the volatility, profits on the bear side appear to be in the works. Just watch out for a bounce.