Market Direction Tug Of War For Apr 22 2013

Most investors realize that this week the worst for the markets in 2013. That said, 5% and 10% market direction corrections are normal in bull markets and this correction has the S&P 500 down 2.4 percent from its all time high. It is important to keep things in perspective when investing and turn down all the noise from the outside and look at the charts. On Thursday the S&P 500 breached the 50 day simple moving average but closed at it not below it. On Friday a technical rebound off the 50 day moving average was a good sign and while volume was lighter the index still managed to erase Thursday’s loss and push market direction back up. The Dow though just scraped by.

Market Direction Short-Term Matters

For all stock and option trading short-term market direction swings matter. Even longer-term investors are nervous after the market direction pull back this week. The problem right now is that the market direction has pushed to all time highs and almost 30% of all stocks are sitting near 52 week highs or all-time highs. There is bound to be consolidation and volatility as many stocks are overvalued. With a little over 200 companies already having reported their earnings, 58% have beaten the general estimates but only 43.9% have beaten revenue estimates. In other words the majority of companies are not realizing increases in revenue. It is revenue that drives the market direction and while investor enthusiasm can push the market direction beyond a normal high such as was the case in 2007, eventually revenue must be able to sustain the higher multiples that stocks will trade at. The present revenues are the lowest since the 4th quarter of 2008 and 1st quarter of 2009.

The fourth quarter revenues for 2012 surprised to the upside which was a big part of the push behind investors jumping into the market in January and pushing stocks higher. The belief then was that the revenues would keep climbing which would support higher stock valuations. To date, this is not the case.

Market Direction and IWM ETF Russell 2000

The Russell 2000 had a nice move higher for market direction on Friday up a little over 1% but as you can see in the chart below the Russell ETF IWM, is sitting just above the 100 day exponential moving average (EMA) after plunging through the 50 day simple moving average (SMA). Investors who read my article on 3 signals for spotting the Great Bear should be aware of the significance of this present position of IWM. This is a very broad-based ETF which comprising 2000 of America’s best medium to small businesses. Next week will be pivotal for stocks in general and the IWM ETF specifically.

market direction IWM Apr 19 2013

Put Selling In The Correction

On Friday almost all of my puts expired out of the money which shows the advantages of reducing put contract sizes, studying support levels, reviewing accumulation and distribution technical indicators and Put Selling at or below support. Friday also shows the advantage of staying with large cap dividend paying stocks that have a long history of profits and support strength, particularly institutional strength. Many of these stocks keep making big gains on up days such as Friday and limited declines on market direction down days like Thursday. For now most big caps are hanging on with swings but in general limited losses.

Put Selling during a market direction correction brings in larger profits due to the higher volatility, but safety has to be a prime concern and that means staying out of the money, picking good support levels, rolling down at the first sign of trouble or closing positions early once most of the profit has been realized. It also means watching for drops in stocks within the watch list and being careful to keep some cash to the sidelines by reducing put contract sizes. Reducing the amount of capital at risk is always worthwhile in this type of environment because the capital that is at risk is earning better profits because option premiums are higher. This means I am earning very good returns but with less capital exposed. In the end the returns may be about the same as before the correction when I had to apply more capital to earn what I am able to earn now, but then that is the benefit of a good correction, better option premiums and less capital needed to still meet my goals.

Market Direction New From Friday

News on Friday included IBM stock pulling back 8.3 percent due to an earnings miss, the first since 2005. Sales were down 2.3 percent. GE Stock fell 4.1 percent after announcing earnings that met estimates but were not better than expected. Microsoft Stock was up 3.3 percent on strong earnings. ABX Stock was up 1.1 percent even though the board of directors approved a bloated signing bonus to John Thornton of $11.9 million. Gold rose only $8.30 and crude was up just 16 cents.

Market Direction Closing For Apr 19 2013

The S&P 500 closed at 1,555.25 up 13.64 points. The Dow closed at 14,547.51 up just 10.37 points. The NASDAQ closed at 3,206.06 up 39.69 points and back above the 100 day EMA but below the 50 SMA.

Market Direction Technical Indicators At The Close of Apr 19 2013

Let’s take a moment now and review the market direction technical indicators at the close of Apr 19 2013 on the S&P 500 and view the outlook for April 22 2013

 

Market Direction Technical Analysis Apr 19 2013For Momentum I am using the 10 period. Momentum is neutral.

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 Monday April 15 and that signal continues to expand to the downside.

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 on Friday turned back up but remains negative.

Rate Of Change is set for a 21 period. Rate Of Change also turned up and is slightly positive but more neutral than anything else.

For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic issued a sell signal on the market on Monday April 15. The Slow Stochastic is approaching oversold territory but still has plenty of room to fall. It is still signaling that the market direction will be lower during the start of this week.

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 issued a confirmed sell signal on Monday April 15 and should the market turn back up on Monday it will probably end that sell signal. The pull back had created an oversold condition on the S&P 500 and as the index hit the 50 day simple moving average (SMA) it bounced. The market direction up reading is weak but it is still showing market direction will be higher on Monday.

Market Direction Outlook And Strategy for Apr 22 2013

The market direction outlook for Monday is for confirmation that the market direction can recover the 50 day simple moving average (SMA). The consensus among the technical indicators is that the market direction is more neutral than up or down and often that type of reading means the bias is to the downside as that is the easier move for the market direction. Monday then I am expecting a bit of tug of war for the market direction.

April is the best month for stocks but not so far. Still though the market direction could still surprise to the upside but if it is having trouble presently the concern will be May to July which tends to be a weak period for stocks. The thought of that period being just around the corner may be enough for a lot of investors to take final profits and wait for a better signal as to the market direction.

The strategy I am using presently, is described above under the heading Put Selling In The Correction. I believe part of the reason I have been successfully investing for a long time is because I take corrections seriously and reduce the number of put contracts I sell and stay with big cap stocks, selling puts out of the money. I am always more concerned about protecting my capital during periods of correction rather than earning big returns. As long as earnings are still being made, that’s a great goal to have. Safety comes first while I wait for market direction to give clear indications that it can recover the recent highs.

Internal Market Direction Links

Profiting From Understanding Market Direction (Articles Index)

How I Use Market Timing

How I Use Market Timing

Understanding Short-Term Signals

Various Market Timing Systems

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