Thursday saw the overbought market finally pullback. The index has been struggling at the 2730 to 2740 level and once it was unable to break through, it only took a string of bad news to send investors packing. Thursday saw volumes increase and stocks tumble. The indexes closed off the lows of the day, but the outlook is not for a one day down and then back to up scenario. Let’s review the SPX chart to see what the index is advising investors prepare for.
Stock Market Outlook Chart Comments At The Close on Thu Feb 7 2019
The S&P is still bearish with 6 sell signals.
There is still 1 up signal as of Jan 31 when the 21 day rose above the 50 day.
The 50 day moving average is slowly climbing but the 100 and 200 day are still not showing any signs of potentially rising.
The closing candlestick on Thursday was bearish for Friday. As well, the index fell quickly from the Upper Bollinger Band to break through the 200 day moving average and almost down to the 100 day. All three of these technical events are bearish signals.
The Lower Bollinger Band and the Upper Bollinger Band are turning higher indicating there is more upside ahead for the S&P.
The chart is still predominantly bearish which is why caution is still worth observing. The next move, following the index falling back to close just above the 200 day moving average after breaking it, is almost always lower.
Stock Market Outlook: Technical Indicators Review:
Momentum: Momentum is positive and falling. This is bearish.
- Settings: For momentum I use a 10 period when studying market direction.
MACD Histogram: MACD (Moving Averages Convergence / Divergence) issued an up signal on Fri Jan 4 2019. That up signal was weaker on Thursday.
- Settings: For MACD Histogram, I am using the Fast Points set at 13, Slow Points at 26 and Smoothing at 9.
Ultimate Oscillator: The Ultimate Oscillator signal was falling and is no longer overbought. It is bearish.
- Settings: 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.
Slow Stochastic: The Slow Stochastic has a down signal in place for Friday and is still overbought. This is bearish.
- Settings: For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic tries to predict the market direction further out than just one day.
Relative Strength Index: The RSI signal is falling and no longer overbought. This is bearish.
- Settings: The relative strength index is set for a period of 5 which gives it 5 days of market movement to monitor. It is often the first indicator to show an overbought or oversold signal.
Rate of Change: The rate of change signal is falling indicating more weakness should be expected. This is bearish.
- Settings: Rate Of Change is set for a 21 period. This indicator looks back 21 days and compares price action from the past to the present. With the Rate Of Change, prices are rising when signals are positive. Conversely, prices are falling when signals are negative. As an advance rises the Rate Of Change signal should also rise higher, otherwise the rally is suspect. A decline should see the Rate Of Change fall into negative signals. The more negative the signals the stronger the decline.
Support Resistance Levels To Be Aware Of:
2900 was support – this will be strong resistance
2860 was support – this will be resistance
2830 was light support and will be light resistance
2800 is strong resistance
2795 is light resistance
2745 to 2750 is light resistance
2725 is light resistance
2700 is still resistance
2675 is light support
2650 is support
2625 is light support
2600 is support.
There was good support at the 2550 level which is back to being support.
The 2500 level is support.
The S&P has light support at 2480 and better support at 2450.
There is good support at 2425.
Below that there is some support at 2400, 2380, 2350.
2300 has the most support at present but would represent a full correction of 641 points as a drop to this level would be 21% and just 5% away from a full bear market signal ending the bull market from 2009.
Stock Market Outlook for Tomorrow – Fri Feb 8 2019
The technical indicators are predominantly turning bearish. The Slow Stochastic has issued a sell or down signal today.
There is no indication that we will see a bounce on Friday. The index looks set to move below the 200 day moving average and probably close below the 100 day moving average on Friday.
This is not any indication of the rally ending, but it is advising to take profits and prepare for more weakness on Friday and a lower close. Monday we may see an attempt at a bounce but the likelihood of more downside on Monday is high. The index is probably preparing to challenge the 2650 and then the 2600 level to find some support. That would place the index at the 50 day moving average. For Friday however the low should not be much beyond or even down to 2675.
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