In my market direction comments yesterday I said “a big drop like Monday is rarely a single day event. Almost every big drop is retested at some point in the near future.” So was today the day when the correction was retested or is the correction which started last week well underway? My short-term indicators can only look out a few days at most and usually just one to two. But there are simple things we can look at which include the lows and the market direction action over the past few days. Let’s take a look.
Market Direction S&P 500 10 day 30 minute chart
Below is the S&P 500 10 day 30 minute chart. You can see the low on April 5 of 1539.50 intraday early in the morning. From there the market direction rallied into a new all time high which unfortunately it could not confirm with another higher-high. Instead from there the market direction has moved lower. You can see that we now have a pattern of lower highs and lower lows. Today the market direction collapsed until around 12:30. Today’s intraday low did not reach the April 5 low, which is a good sign and the market tried to rally back following that low. The clue to whether this will be a deep correction or shallow should be seen over the next several days. If the 1539.50 low is broken, then the market direction will make a new low which also must be test. This means is the April 5 low is broken, first the market direction will move down and then bounce. Following that bounce we want to watch to see if the market direction fails to break the next low. If for example market direction trends sideways, that’s fine as long as it does not break into new lows. Meanwhile we could go sideways and as long as we start to create a pattern of higher highs and higher lows in the S&P 500 then we know it is time for more Put Selling. Otherwise there is no need to be selling puts at this point in the correction as market direction should continue to move lower.
Therefore there are 2 things to watch for the S&P market direction:
1) The 1539.50 cannot be broken.
2) The pattern of lower highs and lower lows needs to be reversed, even if just a small measure, but reversed.
S&P 500 Market Direction Action For Apr 17 2013
Below is today’s market action. You can see the fall in the morning and then the market bottomed at around 12:30. The rally back through was shallow and if you look at the chart you can see the pattern or NO higher highs. The market direction did not sell-off in the afternoon but it failed to move higher. Investors remain undecided and nervous.
S&P 500 for April 17 2013 - 5 minute chart
Market Direction and the VIX Index
Another clue to help us is the VIX Index which measures volatility within the S&P 500. I think everyone knows how the VIX Index works in regards to market direction but for those who don’t consider reading this strategy article that explains the VIX Index. The VIX Index 10 day chart is below set for 5 minute time frame. You can see that the VIX Index is doing the exact opposite of the S&P 500. The VIX Index is trading with higher high and higher lows. Even if the S&P 500 has some up or down days, watch this index. If the S&P 500 moves lower but the VIX Index does not set a high above $18, then the selling could be coming to an end. On the other hand if the VIX Index keeps rising, even if the S&P 500 tries to rally, then wait as the market direction is probably going to turn lower. For example on Tuesday April 16 the market tried to roar back up but the VIX Index did pull back below $14. This was another indication that the bounce back on Tuesday was just a technical rebound caused by the huge sell-off on Monday. Sure enough today the VIX Index moved higher setting up another higher high and the low for today set another higher low. This pattern must reverse for the correction to slow and stall out.
On the above VIX Index chart I have marked where I bought my next set of VIX Index calls 3 months out. I bought the $13 calls again. once the $12.50 was broken in the VIX Index. The strategy being used is the Stock Market Trading VIX Index strategy. You can read about this strategy through this link. These are the types of strategies to use when the market direction starts to be pressured. You can also consider the Market Direction Portfolio with the strategy of buying the DXD or other ultra short ETF. FullyInformed members can read about Doug Harris’ latest purchase of the DXD ETF which is a 2X Ultra Short ETF through this link. These are simple strategies that can pay big dividends if used properly.
Paper Trading For Profits
This latest correction is a good chance to try out some of the shorting type strategies of the VIX Index, the Ultra-Short type ETFs or even my Spy Put Options Hedge. Paper trading is an excellent means to become better at timing when to get in and get out of these trades using the above strategies and products. Remember, there will always be corrections and paper trading them is an excellent way to educate yourself so you are ready for the next bear market.
Market Direction Closing For Apr 17 2013
The S&P 500 closed at 1,552.01 down 22.56 and wiping out yesterday’s gains. The Dow closed at 14,618.59 down 138.19 after yesterday’s 157.58 point gain. The NASDAQ closed at 3204.67 down 59.96 which was worse than yesterday’s 48.14 point gain.
Market Direction Technical Indicators At The Close of Apr 17 2013
Let’s take a moment now and review the market direction technical indicators at the close of Apr 17 2013 on the S&P 500 and view the outlook for Thursday April 18.
For Momentum I am using the 10 period. Momentum is on a roller coast ride. Monday it was negative, Tuesday positive and today negative but overall momentum is more neutral than anything else at this point in the correction. This is a good sign and indicates, so far anyway, that the drop in the market may not be very severe.
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 a sell signal on Monday April 15 and that signal continues to expand to the downside.
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 also on the same roller coaster as momentum and today it is back negative.
Rate Of Change is set for a 21 period. Rate Of Change is more neutral than positive or negative which reflects on the stance of most investors. A wait and see approach is being used by most investors.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic issued a sell signal on the market on Monday April 15 and today that sell signal is still active. The Slow Stochastic continues to point to a lower market later this week.
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 issued a confirmed sell signal on Monday April 15. Today that sell signal is still active and direction is still down. Yesterday the fast stochastic was unimpressed with the market direction push back to up. Instead it signaled that we would see a lower day on Wednesday. It was correct. For Thursday it is signaling more downside ahead.
Market Direction Outlook And Strategy for Apr 17 2013
The market direction yesterday saw a recover of slightly more than 60% of the losses from Monday. Today almost everything was given back. The NASDAQ though gave back a lot more thanks to Apple Stock which for the first time since December 2011, fell below $400 before climbing back to $402.80 at the close.
The market direction indicators remain wary of this market. The overall stance is that the roller coast ride lower may continue but the mood among investors is extreme caution which means the market has little it can do except move lower.
There is not a lot to say for tomorrow. The market direction, even if it can rise needs to meet the criteria I have outlined above for the correction to end. Don’t count this market out, which means I am not shorting the market. I am only using the Spy Put Options for day trading the downward movements. I am not holding Spy Put Options over the evening and definitely not over any weekend. Be careful, keep closing naked put trades or most option strategies that have good gains and take very small positions until the market direction is clearer.
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