The market direction outlook for Tuesday was for stocks to move higher. Fed chair Janet Yellen though had other ideas and in her testimony to Congress today announced that many social media and smaller tech companies were over stretched, in other words, overvalued. I cannot recall any time when the Federal Reserve has been so specific in a sector of the stock market. The comments stunned investors and probably many within the committee as well. Let’s take a look at the intraday chart and then move on to the technical outlook following her comments.
Market Direction S&P Intraday Chart July 15 2014
The one minute intraday chart for July 15 shows us two distinct patterns. The Fed Chair’s comments pushed stocks lower into the lunch hour. After lunch they gradually recovered but still closed down 3.82 points.
Advance Declines For July 15 2014
Volume picked up today with 3.3 billion shares or about 600 million more shares traded. Down volume made up 60% of the shares while up volume was 37%. There were just 87 new highs but 27 new lows. It is hard to read much into these numbers however as they were heavily manipulated by Yellen’s comments.
Market Direction Closings For July 15 2014
The S&P closed at 1973.28 down 3.82. The Dow closed at 17060.68 up 5.26. The NASDAQ closed at 4416.39 down 24.03
The Russell 2000 IWM ETF closed down a full percent losing $1.14 to close at $114.55.
Market Direction Technical Indicators At The Close of July 15 2014
Let’s review the market direction technical indicators at the close of July 15 2014 on the S&P 500 and view the market direction outlook for July 16 2014.
Stock Chart Comments: If you look at the chart above you can see the levels marked A, B, C and D. I explained in the past few market direction outlooks that these levels show a pattern of reaching a new high and then a slight pullback and then another move back up. You can see that today’s movement though is breaking that pattern. This is the first such alteration to the pattern in the past three months.
Support levels at present are 1956, 1930 and 1919 which are all light support. 1870 and 1840 are strong support. 1870 and 1840 at present mark important trading levels for investors. Both are now below the 100 day exponential moving average (EMA) so any pullback this summer which breaks 1870 should be used as a signal to commence picking up ultra short ETFs or spy put options 2 months out for a bigger move lower. A break below 1840 at present would challenge the 200 day EMA.
I have repeatedly mentioned two other support levels, namely 1775 and 1750. As the market continues to push higher, these are now critical support levels. 1775 is important but 1750 is now the bottom line. A break of 1750 would mark a severe correction of 11% at present which 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.
My Pullback Outlook: I have been waiting for a pull-back this summer to between 1870 to 1919. At present even though the market seems weak, you can see in the chart above that we are simply experiencing some weakness after setting another new high. This pattern of setting a new high, then pulling back and then rallying higher has been repeated often over the past several months. Therefore the pullback I am looking for is not being signaled at present. That does not mean we will not get a pullback but it does not look like any such pullback will begin this week. Indeed this week actually looks more like stocks will move higher still.
Overall there are still far too many analysts expecting a pullback, in my opinion. It is rare when the majority of analysts are correct so we may not experience a downturn yet. When most analysts are bullish, and many bears have joined them, that would be the time for a pullback in my opinion.
Momentum: For Momentum I am using the 10 period. Momentum has been the best indicator, replacing MACD as the most accurate indicator. Momentum is still positive and moving sideways..
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 and the sell signal is still active today.
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 positive and continuing sideways. It is overbought.
Rate of Change: Rate Of Change is set for a 21 period. The rate of change remains positive and sideways.
Slow Stochastic: 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 back to up for mid-week.
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 has now changed to an up signal for Wednesday.
Market Direction Outlook And Strategy for July 16 2014
For Wednesday the Market Direction Technical Analysis shows that only MACD is negative and the other indicators are all positive. During the day Goldman and JP Morgan produced outstanding revenue increases. After hours Intel stunned investors with a large gain beyond estimates and Apple announced a corporate collaboration with IBM. Tomorrow should see stocks jump at the open on the news. A lot of the down action today was caused by Janet Yellen’s testimony to Congress. Tomorrow we should see stocks recover and close higher than today.
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