The market direction outlook for Tuesday was for the markets to try once again to rally back. That effort never happened as talk of taking military action against Syria sent stocks into a tailspin. Today was one of the better Spy Put Options trades and shows that it is not necessary to pick the “perfect” moment to buy protection. Instead it is simply being aware of the trend and it was obvious from the mood at the open that the trend would be lower all day. It would have taken a peaceful resolution to the Syria issue to have turned stocks around and that was not going to happen in such a short time period.
Two others stats that came in continue to point to the recovery continuing with consumer confidence at a high not seen since 2008 and housing prices continuing to climb. You can read more about that in my intraday market direction comments here.
Market Direction Action for August 27 2013
The market direction action for today was all negative. The market opened with a gap down open and then set up the unmistakable pattern of lower highs and lower lows throughout the day. At the close the S&P market direction failed to sustain even a small closing rally but instead fell back, closing near the lows for the day. A bearish sign for sure but not caused by the economy. Instead it is fear of uncertainty over possible military conflict with Syria.
Market Direction Closing For Aug 27 2013
The S&P 500 closed at 1,630.48 down 26.30 and back well below the 50 day moving average. The Dow closed at 14,776.13 down 170.33. The NASDAQ for the first time closed down more than either the Dow or the S&P at 3,578.52 down 79.05 as Apple Stock which comprises about 20% of the entire NASDAQ exchange has a poor day falling over $14 or 2.38%.
Market Direction Technical Indicators At The Close of Aug 27 2013
Let’s review the market direction technical indicators at the close of Aug 27 2013 on the S&P 500 and view the market direction outlook for Aug 28 2013.
For Momentum I am using the 10 period. Momentum is back negative and reflecting the most negative readings since the latest correction started.
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 weak sell signal on July 31 which was confirmed August 7. MACD moved higher yesterday but today MACD has turned sharply lower which produced a higher negative reading signaling more downside is ahead.
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 back to oversold after trying to rise over the past couple of trading days.
Rate Of Change is set for a 21 period. The rate of change is negative and trended lower reflecting that sellers have the upper hand and buyers are moving lower with their bids.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is signaling that the market direction is now down and it is oversold.
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 is indicating that the market direction is down and it is extremely oversold.
Market Direction Outlook And Strategy for Aug 28 2013
The mood will not change overnight unless there is a peaceful and quick resolution to the Syrian crisis. Gold is up, the US Dollar up, oil up and stocks down. The NASDAQ in particular got hit hard today falling more than either the Dow or the S&P 500. All the technical signals that has started to improve are now strongly negative and are signaling that further weakness in stocks should be expected for tomorrow.
For investors who missed my intraday look at trading within stocks when the market direction is to the downside, here again are some of my suggestions to profit and protect in an unpredictable market direction:
Trading Market Direction To The Downside
It is important to trade what is before us. At this point the S&P 500 is back below the 50 day simple moving average (SMA) which will cause concern among investors. More selling will ensue especially if the Syria issue is not quickly resolved. I will be trading primarily to the downside. If any of my naked puts get in the money I will either roll them sideways if I like the put strikes I have sold, or down if I wish to be in the stock lower. I will be committing further capital once I see what support levels are reached and which ones are broken.
Naked Calls In Present Market
Naked calls are definitely an area I may consider but I would most like do call credit spreads as this market direction could quickly turn back up if there is a quick resolution. The call credit spread can help protect against losses and certainly would limit losses.
Naked Puts Turned to Put Credit Spreads
For other stocks, investors may want to consider put credit spreads to support naked put positions. For example this morning Johnson and Johnson Stock is continuing lower and for investors not interested in owning shares who have sold the $87.50 naked put (which I did), they may want to roll lower and add in some purchased puts to protect against any further downside action. This is not what I will be doing but for nervous investors it is always a choice to consider as a put credit spread will buy some protection against further downside movement.
Covered Calls – In The Money
One of the better ways to protect stock positions is the selling of in the money covered calls. Depending on your outlook for the stock and your degree of comfort investors normally decide how deep in the money to sell calls at. It has to be remembered that in the money covered calls opens up an investor to the possibility of assignment especially if there is a rapid and swift jump back in the stock or market direction. But by selling in the money covered calls an investor can earn some income, protect against additional downside action and buy back the in the money covered calls as a stock moves lower, which then locks in the profit from the in the money covered calls and frees the stock from any possible assignment.
Summary Of Outlook For August 28
I am taking only small positions when selling naked puts and for those who have a low comfort level within stocks the best course is to move to the sidelines and either just hold puts, Ultra Short ETFs, or move to cash. For myself I love the volatility and will continue to stay in the markets. Just doing the Spy Put Options and the Trading For Pennies Strategy trades brings in literally thousands in a volatile market. Meanwhile Put Selling is much more profitable but the chance of assignment is much higher so it bears repeating that I only sell puts against stocks I would own.
Tomorrow then I am expecting more downturn to the market direction but it may not be as strongly negative as today depending on the outcome with Syria and that is the type of event whose outcome is unpredictable.
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