Market Timing / Market Direction – What Next

Market Timing indicators on Wednesday and Friday warned that a big bounce may be in the works. The market direction change from down to up has caused a lot of chatter from the talking heads but what does the rally really mean? The move was a technical bounce. It was a great bounce but still it was technical in nature stemming from an extreme oversold condition.

Today’s bounce now leaves the question of can market timing tell us what market direction we can expect next. I believe market timing at today’s close can tell us what to expect next in the market direction.

Market Timing / Market Direction Chart for Nov 28 2011

Advances on the S&P led declines by about 6 to 1. However money flow indicates that after the initial pop at the open, there were lots of sellers unloading stocks. Many retail investors seemed to be buying but a lot of hedge funds and money managers were selling today’s rally.

Technically it is obvious to say that one day does not a market make. The S&P must get back above 1200 and hold. All the major moving averages, 50, 100 and 200 must still be breached.

RSI remains negative, the Ultimate Oscillator which I discussed yesterday is still very negative and MACD has improved but it is only slightly better than Wednesday reading.

Market Timing / Market Direction for Nov 28 2011

The S&P 500 for Nov 28 2011 shows that while market timing has improved it will still need more positive days to give a market direction change indication

Market Timing / Market Direction What Next

The markets need another big up day tomorrow or certainly by Wednesday to give technical indicators thestrength they will need to turn positive. If you recall from my articles on financial investment tools to spot collapsing stock MACD is among the most important indicators and right now it is not supporting today’s rally. With such a big move it should have turned up. The Ultimate Oscillator, one of my favorite market timing tools, is still very much in bearish territory although the rally today did a lot to move the markets out of oversold territory. This market timing link looks at 1 year on the S&P.

Market Timing / Market Direction Strategy For The Next Few Days

The market must rally further and then stay above 1200. Otherwise this rally is just another market timing technical bounce.

Market Timing And Deep In The Money Calls:

Until market direction is a definite up for the month, I will not be buying back any deep in the money call positions. I plan to wait another day to see if the market can rally. The technicals indicate that the market is still under stress. If that remains the case, even in a rally, I will buy back my deep in the money calls and continue to roll them further out but at the same strikes. It is obvious by looking at the market timing indicators above that the market direction could quickly change back down and I would not want to roll up covered calls only to find that I need to roll them back down.

Market Timing / Market Direction Put Selling:

I sold a lot of puts in the downturn and again on Friday I sold more. Still I have capital available. If the S&P can get above 1200 within the next day or two and stay above it, I will put the rest of that capital back to work selling puts. If the market moves higher, holding sold puts will work out well for the remaining 3 weeks in December before options expire.

Market Timing / Market Direction Summary For Nov 28 2011

It’s nice to see a great rally like today. It bodes well for the market that the market timing tools saw the rally in advance and the market followed through with the market direction change. Now the market must pull itself over the 1200 level and hold it, to rally into the end of the year. I would say the odds of that happening based on the market timing indicators and Europe’s woes is probably 40% and therefore staying with put selling and deep in the money covered calls continues to make sense.

  • toby


    Great analysis. I guess that’s why we all pay you the big bucks! :-)

    But I’m missing some important bit of understanding. The technical indicators all were extremely negative before the bounce, indicating that yes the market was oversold, and could well bounce sooner or later.

    But why did that mean the market would bounce sooner, not later? To my mind it could as easily have declined through key support levels and given us a 2008 scenario.

  • That is the beauty of technical charting and analysis. In my article How Big A Bounce I showed the readings from the Oct 2008 crash, March 2009 crash and the recent downturns including August. The readings for Friday were actually worse than the Oct 3 readings in the S&P. These extreme readings are sure signs of a market bounce. While it may not have occurred on Monday, the market would have had to undergo a shock in order to collapse further. Instead the market bounced. It’s an easy call when you study the Ultimate Oscillator, MACD, and McClellan Oscillator.