I had not expected a rally back today although it is to be expected after the drop on Tuesday. Instead I had expected a fairly flat day and then a rally on Thursday once investors saw that the market direction down was stalled for Wednesday. Instead the rally took place today which considering the oversold nature of the drop on Tuesday is not unusual. There are a few charts I want to go over this evening as we look at what Thursday’s market direction may do.
Market Direction Action For August 28 2013
The first chart is the 5 minute chart from today. You can see that the market opened with buyers stepping in. They pushed the market up until around 1:00 PM. At that point buying stalled and sellers entered. The S&P 500 then exhibited the old pattern of lower highs. The close though is interesting in that the S&P 500 closed just above the first early morning high. This is typical of a market in trouble. This type of pattern is often seen in a market that is just bouncing back from a sell-off before more selling occurs.
Advance Declines For August 28 2013
In my intraday comments today I mentioned the advance decline comparison and the number of new highs and new lows. When I was writing my intraday outlook it was around 12:40 PM. At that time about 2400 stocks were advancing and 1500 were declining but the number of new highs was just 45 but new lows was 148.
At the close today advancing issues declined to 2206 or 53% of the market. Declining issues were 1843 or 44%. Worse though the number of new lows was at 171 versus 56 new highs. Despite the bounce back the trend remains lower for many stocks.
Market Direction Moving Averages Breaking
The next chart we should look at in the S&P 500 3 month daily chart. The pattern there too is unmistakeable. We are seeing lower highs. As well the S&P 500 is now down to the 100 day exponential moving average (EMA). When a market direction up breaks and the market down moves quickly to the 100 day EMA such as we saw on Tuesday, it is common for the market to try to hold the 100 day but in most instances, the 100 day breaks within just a few days.
Market Direction With The Moving Averages
Another chart that is interesting is the 10 20 30 moving averages strategy which many investors may recall I have mentioned many times. This moving average is a fairly good judge of the direction of the underlying asset. In the chart below I have applied it to the S&P 500 daily chart for the past 3 months. I have marked the 3 moving averages on the chart below. The 10 day is a simple moving average (SMA) and the 20 and 30 days are exponential moving average (EMA).
At point A August 20th, the 10 day SMA crossed down and over the 20 day EMA.
At point B August 22nd, the 10 day SMA crossed down and over the 30 day EMA.
These two signals advised that the short-term direction of the market direction is lower.
At point C August 26th, the 20 day EMA crossed down and over the 30 day EMA signaling that the intermediate-term direction is lower as well. Today despite the little rally back the 20 day EMA is continuing to fall away from the 30 day EMA. The 10 day SMA is falling faster and lower.
Market Direction Closing For Aug 28 2013
The S&P 500 closed at 1,634.96 up 4.48. The Dow closed at 14,824.51 up 48.38. The NASDAQ closed at 3,593.35 up 14.83.
Market Direction Technical Indicators At The Close of Aug 28 2013
Let’s review the market direction technical indicators at the close of Aug 28 2013 on the S&P 500 and view the market direction outlook for Aug 29 2013.
For Momentum I am using the 10 period. Momentum is still negative although up slightly from yesterday which is to be expected with today’s bounce. Momentum though shows a continuing weakness in the market direction.
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 is sharply lower but is unchanged from yesterday with a very negative 5.18.
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 still oversold despite a slight jump higher today.
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 still down and it is still extremely 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 too is extremely oversold.
Market Direction Outlook And Strategy for Aug 29 2013
I included all the above charts to show that the market direction is definitely in a corrective phase. This is a bull market and a recovery is possible but at this point all the market direction technical indicators and moving averages point to lower prices ahead. Trading volume today was very thin as many investors are still trying to sort out what happened on Tuesday and if it marks the start of a stronger move lower. A lot too depends on the US response to Syria and how quickly it is resolved and to what extent the US will intervene in a military manner. Will it be a small commitment or a larger response. Will it be primarily air or will the President send in ground troops. All of this is weighing on investor sentiment.
Energy Stocks – Exxon Stock
It was energy stocks today that rose.I sold my Exxon Stock on August 26 which you can see in the Exxon stock 2013 trades as I thought it was a good valuation to sell at. Today would definitely have been better. Chevron Stock was up 2.5 percent and Exxon Stock was up 2.3 percent providing the biggest boost to the Dow Index.
VIX Index Calls
The VIX Index fell back today by about 2.4 percent but I believe there will be higher gains ahead. I have unloaded all my VIX Index calls back on August 21, so I am sitting with no VIX Index calls. I may have to step in and buy some shortly but I always hate to chase a trade. I did well on my VIX Index calls but those still holding them are sitting with some very good profits now which may become even better shortly. I unloaded my VIX Index call options in groups of 5 call contracts. I prefer selling my calls in groups as I can never judge when the VIX Index may turn around and fall back. By selling in groups I almost always end up with a decent return and manage to catch some of the better prices. This time is not going to be the case unless I buy some more and right now they are expensive.
Outlook and Strategy for Thursday
Little has changed in my strategy. I expect lower prices tomorrow for stocks and I am staying with small put contract volumes on stocks I would own. I will probably be moving back into the market direction portfolio on Thursday but I want to wait to see the morning open first. The outlook for stocks remains weak and I plan to continue to trade my Spy Put Options and the Trading For Pennies Strategy to the downside.
Yesterday I went over my ideas for staying profitable and protected during this correction. For anyone who missed them you can read them here. For FullyInformed members I wrote about adjusting strategies depending on S&P 500 valuation levels. Members can read that article here. As well for members you may want to read again these articles:
5 Steps To Building Confidence to Trade Market Downturns Using Spy Put Options
8 Simple Strategies To Profit From Bear Markets and Corrections
Market Direction – How I Handle A Correction
Remember that a downturn is an opportunity not to be missed. It can grow a portfolio in ways that buying stocks in an uptrend cannot. The above three articles may help investors with preparing for more downside action.
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