Market Direction Still Under Pressure With Market Timing Showing Overbought

Market Direction was very constructive last week as the S&P did a little back filling and finished near the highs for the week. The dip buying by investors continues as it has for many weeks during this recent correction. The back filling is important as it helps build support for a market direction push higher. If the market had just shot up this week the rally would be suspect where right now the rally has good strength although breadth is slight. However at this time of the summer often volume and breadth in market direction is poor as so many investors are away from the markets.

Why Is Market Direction Moving Higher

A lot of analysts keep pointing to the belief that investors are buying the markets on the expectations that the Federal Reserve, ECB and China will soon pump more liquidity into the markets in an attempt to bolster economies. Many of these same analysts also point out that when this does not happen the market is going to see a severe pullback.

Then there are the analysts who think the market is signaling that the US Economy will improve in the fall as the US heads into the Presidential election campaign.

Trading Options Environment

This is why trading options is excellent for this kind of environment. While the market remains uncertain, Put Selling or put credit spreads remains viable strategies to keep bringing in income. While many investors may not have a lot of experience with this kind of market, I have seen this type of market many times in the past. There are two things to watch for with this rally from the start of June. The first is that volume does not fall off any further. It would be better if volume picked up but as long as it does not fall off further then there should be enough push to market direction to move higher. The second thing to watch is for market direction to push above the April high and do a little back filling but not falling. As long as the market does not make a second top then the market direction push higher will remain intact.

Market Timing Technical Indicators

Right now the most important market timing indicators are those showing the short-term trend. As the market direction continues higher, short-term market timing indicators need to be viewed daily to confirm the market direction stays on course. Normally in this environment with the market trying to push and break the previous 52 week high, the important thing for put sellers is to close positions that have the most chance of being caught in any pullback. For example if I had sold the $25 put strike on a stock and the stock was now pushing into $25.35, I would be watching the short-term market timing indicators for any sign that the market may want to pullback as this is August options expiration week. As the week progresses if the stock stays around $25.35 I remain unconcerned, but if the stock should start to pullback lower I normally put in an offer to close for a few pennies if I am only at Wednesday or Thursday.

However if I have also sold the $24 naked puts, I would rarely if ever close the $24 naked puts even if the stock should pullback to $25.00 unless the short-term market timing technical indicators signaled a large market pullback, which presently is not in the cards.

So let’s look at the market timing indicators for market direction outlook heading into Monday August 13 2012.

The most significant signal is the market is very overbought. Momentum has been declining much of the past few trading sessions which reflects the low volume. MACD is still quite positive but on Friday it did pull back from Thursday’s reading.

The Ultimate Oscillator is bouncing around overbought while Rate of Change is down on Friday from Thursday’s reading.

Meanwhile the Slow Stochastic is at extreme overbought as is the Fast Stochastic.

The extreme readings from the Fast and Slow Stochastic are warning investors that selling could erupt at any time in the rally, which ties back in with my comments about closing sold puts that are very close to being in the money.

Market timing technical indicators for market direction

Market direction remains under pressure as the market is very overbought.

Market Direction Outlook

Market timing indicators bear watching all week as options expire this week and I would not want to have those sold puts that are close to in the money end up in the money. If I can close a naked put that is close to being in the money, yet can be closed for pennies, I will. For all other out of the money puts that are further out of the money for August I will be letting them expire as there are no signs in the above market timing that would indicate that market direction is g face anything worse than a small pullback.




  • Chester the Income Investor

    Thank you again for sharing your insights and experience!