The market direction outlook for Friday was for stocks to rebound after Thursday’s big drop and then fall lower. The rally though was poor at best and lasted for mere minutes as sellers re-emerged and pushed stocks still lower. On Friday the unemployment report was not as good as expected with 225,000 more jobs added but it marked the 6th month in a row of gains. It was the slight uptick in the unemployment rate to 6.2 percent that caught the attention of investors as this showed that more of the unemployed were back looking for work. This is generally the final stage of the employment cycle and it can last for months to a couple of years as the non-participating unemployed return to the job hunt. This also usually means the economy is improving, more jobs are becoming available and with that probably interest rates will rise. At this point in time it does not matter to investors whether interest rates rise even slightly, perhaps a quarter of a point. It is the fact that interest rates may rise that has investors worried. This seemed to be the prime reason stocks sold lower on Friday.
Market Direction S&P Intraday Chart August 1 2014
The one minute intraday chart for the SPX for Friday shows the rally which by 10:00 AM was over. From there stocks pushed below the 1930 support level and then by the lunch hour stocks were trading below the 1919 support level. Both of these were light support levels. As the lunch hour ended stocks began to rise again and pushed back to the 1930 level in the afternoon. The close saw stocks at 1925.15 almost exactly half way between the two support levels. This was actually a good sign for stocks as they closed off their lows and between two support levels. This was not the case for Thursday’s close where stocks ended the day at the low for the day. While the rebound on Friday was small and short, lasting les than 30 minutes, there are signs from Friday’s close that a bigger rebound may be in the works for Monday.
Advance Declines For August 1 2014
Friday’s volume fell back with 3.8 billion shares traded. Of that 62% was down while 36% was up. Declining issues made up 61% of the movement on Friday. The new lows though fell back from Thursday’s 125, with 100 new lows on Friday. New highs though were extremely poor at just 14, versus Thursday’s 50 new highs.
Market Direction Closings For August 1 2014
The S&P closed at 1925.15 down 5.52. The Dow closed at 16,493.37 down 69.93. The NASDAQ closed at 4352.64 down 17.13.
The Russell 2000 IWM ETF closed down 0.46% for a loss of 51 cents to close at $110.68. Still it remains well above $108 which is the level I have been watching for signs of a longer term downturn for stocks.
Market Direction Technical Indicators At The Close of August 1 2014
Let’s review the market direction technical indicators at the close of August 1 2014 on the S&P 500 and view the market direction outlook for August 4 2014.
Stock Chart Comments: The most important event in Friday’s stock chart is the bounce of the SPX off the 100 day exponential moving average (EMA). This could be significant or it may be just a one day event.
1975 and 1956 Support: Both of these levels have been broken through and may act as resistance to any attempt to push back up. I believe the close on Thursday below 1956 marked the end to the present rally.
Support levels at 1930 and 1919 are both light support and would most likely just delay a strong pullback by a day at most. On Thursday the SPX closed right at 1930. On Friday the SPX fell to 1919 and bounced off that light support level to close at 1925 which may signal a bigger bounce is coming for Monday.
Strong Support Levels are at 1870 and 1840. The 1870 level is below the 100 day EMA so I am expecting this pullback to reach that far. 1840 is below the 200 day EMA and would mark a serious correction. A break of 1870 is a definite signal that those investors not holding Ultra short ETFs or SPY PUT Options 2 months out, should be doing so by this point for a bigger move lower.
The other two support levels not shown in the chart above are 1775 and 1750. I have explained that these two are critical support for the present bull market. While 1775 is important it is 1750 that is now the bottom line.
A break of 1750 would mark a severe correction of 180 points which is below a 10% correction from the most recent high. This would be the biggest correction since April 2012. A pull-back of that size would definitely stun investors at this point and it is not something I am anticipating as there are no signs of any impending correction of that magnitude. If stocks did get this low it would become questionable if the correction would move down at least another 5%. This has to be assessed as the present pullback gets underway.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. I still believe there are too many signs against a bear market or a severe correction beyond 10%.
The market direction at this point must fall below 1919 at the start of the week to confirm a continuation of the pullback.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is now negative. Momentum continued to move lower into deeper negative readings on Friday.
MACD Histogram: 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 sell signal on July 8. On Friday the sell signal gathered strength to the downside.
Ultimate Oscillator: 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 is now deeply oversold which is almost always followed by a rally higher.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change is now solidly negative but the reading is reaching those levels where normally stocks change their direction from down to up. We could therefore see a rally on Monday.
Slow Stochastic: For the Slow Stochastic I use the K period of 14 and D period of 3. As the Slow Stochastic tries to predict the market direction further out than just one day. The slow stochastic all of last week was negative and indicated lower prices were coming. On Friday the signal is still solidly negative.
Fast Stochastic: 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 remains deeply oversold on Friday and in the chart above you can see the signal that a bounce may be in the works from Monday.
Market Direction Outlook And Strategy for August 4 2014
The rally back on Friday was poor and lasted barely 30 minutes at the open. The technical indicators now have no indicators that are positive. All the indicators are negative but the Fast Stochastic is signaling that a bounce may be coming, the Ultimate Oscillator is deeply oversold and ready for a bounce and the rate of change is so negative that it is signaling the down direction may be about to change.
The outlook for Monday is for the rally I had expected on Friday to commence. If the rally can get back above 1956 and hold there, the market direction pullback will end and a new rally will begin. If a rally does begin it must quickly recapture the all-time high and continue higher.
I am not expecting the rally on Monday to be able to recapture the 1956 level for the SPX, but we may see a stronger close that expected. The bearish sentiment has suddenly jumped to 56% and bulls are down to 30%. This could mean a bounce back on Monday or stocks.
I will be watching the market all day on Monday and will do a morning market analysis and afternoon analysis before deciding on trades. That means there will be no Investing Strategy Notes before the markets open on Monday. Instead I will be waiting to see what the market direction does at the open and then make my investing decisions for the day and week based on what I see by mid-morning.
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