Market Timing / Market Direction Is A SellOff In The Cards

Market timing is for many investors the most important aspect of their investments. While many investors indicate they are not concerned if their stocks fall, this never seems to be the case when market direction changes and stocks collapse. The worry among investors, large and small, retail and institutional is high when markets begin a free fall. Luckily stock market plunges are not common but over the course of the last 15 years, there have been a number of plunges of enormous size and severity. Market timing through technical as well as fundamental analysis can assist in helping investors prepare for market direction downturns whether large or small. There are many things investors can do to hedge their positions. But everyone knows that as markets climb and stocks become overvalued the likelihood of a decline grows.

My market timing indicators for Friday May 4 are little more worrisome than prior weeks. On Friday I posted that MACD gave a market timing sell signal. You can read that article here. My market timing technical indicators are below for Friday.

Market Timing For Friday May 4 2012

The market timing sell signal issued on Friday by MACD (Moving Average Convergence / Divergence) holds importance because MACD is a unique timing tool that watches strength, momentum and direction. It is an oscillator and momentum indicator and when a sell signal is generated it is because the strength behind the selling is strong enough to break up momentum and change market direction.

Momentum is just turning negative on Friday despite the poor showing this week by the stock market.

For most of the week the market timing tool Ultimate Oscillator was falling after flashing an overbought signal on April 30. With a reading on Friday of 40.85 there is still room for the market to fall before the Ultimate Oscillator falls into oversold territory.

Rate of change is the only indicator clinging to a positive bias although more flat than positive with a reading of just 0.16.

The slow stochastic which on May 1 flashed the first market direction down signal has fallen daily and by Friday the strength of the down market direction was creating a stronger pullback in the slow stochastic. The slow stochastic is an excellent market timing tool as it looks beyond short one or two-day market swings.

It is the fast stochastic that is the short-term market timing tool. It tends to reflect one, two or three-day swings in the market. The fast stochastic went negative on Thursday and Friday’s reading of 20.23 in the fast stochastic is showing a market getting set for a bounce but there is still room for more downside before a strong bounce may occur.

Market Timing For May 4 2012

Market Timing For May 4 2012

Other Market Timing Indicators To The Negative

Aside from my market timing indicators above there is also the 50 day moving average which was broken easily on Friday. Analysts indicate that it was the poor employment report on Friday that caused the selloff but I do believe it was already in the works with both the ultimate oscillator already reflecting overbought on April 30 and the slow stochastic on May 1 signalling market down.

Twice the S&P has tried to regain momentum and both times that momentum has failed.

It should be remembered that the his in the Nasdaq Index was back in March and the Nasdaq has been unable to regain that high. As well the S&P 500 high was on April 2 and since then the market has trended sideways with a bias toward market direction down.

On The Positive Side

There are a couple of things to the positive side. This pullback if it stops here is not quite as low as the previous pullback and the more recent high is higher than the previous rally high which could be taken as a positive for the market.

Remember The VIX For Market Timing

Also how about the VIX. On Friday it had a nice move higher but it isn’t yet over 20 which many investors believe is the first sign of trouble in stock markets.

Then There’s Also The Long Term Moving Averages For Market Timing

There’s also the 100 and 200 day moving averages. On the Nasdaq, Dow and S&P the 200 day is a long way off right now. Many investors would caution that until the 200 day is broken the bull itself is not gone away.

And Then There’s This

There are a few other factors weighing on the market. The Sell In May theory does hold some merit and many investors are certainly aware of this. Indeed at the Stock Trader’s Almanac they have pinpointed the period from Nov to April as having the best seasonal trend to higher stocks. According to Jeff Hirsch president and editor-in-chief, the MACD gave a sell signal on April 3 and they have advised their subscribers to prepare for a market decline. He believes there is enough reason for a 10 to 15 percent decline in stock values and he has advised investors to consider using the HDGE which is their favorite Adviser Shares Active Bear Fund. The fund is an actively managed fund that shorts mid and small cap stocks. He believes that the run up in November to April confirms this seasonal trend. Hirsch also mentioned that he believes the market has set up a “three peaks and a domed house” technical pattern discovered by technician George Lindsay. This pattern is nothing I have ever traded against. You can read about it through this market timing link.

Market Timing and Market Direction And Where To Now

No one knows the exact outcome of any market direction but there is enough evidence to support a bounce and then more selling. The bigger question from a market timing perspective is whether there is a larger selloff coming. Through my market timing tools I attempt to follow the market direction and to stay on the right side with as many of my strategies as possible. Right now I will be looking to my spy put hedge for protection against any decline of significance. Other investors may think of bear fund ETFs or moving covered call positions lower.

Bear downturns while often severe can also assist investors in capturing additional income. Through watching the fast stochastic for short-term trades and the slow stochastic for mid-term trades an investor could roll covered calls lower on long-term stock positions and then buy back those positions on any sign of the market direction recovering. Other investors could use any run back up in stock as a chance to buy put positions cheaper than on down days. For others we can wait for those big down days and look to sell puts on our favorite stocks at prices we would love to own them at. If it happens as we get our favorite stocks at great prices we can start immediately with covered calls and again watch for opportunities to buy back profitable covered call positions and roll up or sideways as dictated by the market direction.

Last year I successfully used the cautious bull strategy. I believe my market timing indicators are telling me its time to dust it off once again.