Yesterday in my intraday comments I wrote that ” the market direction is continuing to follow the technical indicators. I wrote that the market keeps managing to recover from intraday pull backs but that will only last so long. It needs to move decisively higher to remove uncertainty and get fresh capital invested from investors.” Today’s jump on the data of household purchases rising the most in 3 months is nice to see but the bigger picture is really more that those stocks that have been beaten down over the past couple of days are now being scooped back up.
YUM Stock
Stocks like YUM Stock that were pounded are being snapped up again once they hit support levels and show signs that they may not fall further. When a big cap stock pulls back, you can be sure that larger investors are watching. They wait for support levels to see what the stock will do. With YUM Stock for example, there was weak support at $75 and then stronger support at $72.50. The weak support took 6 days to break through at $75. Yesterday the stock hit $72.50 and closed back above it. These seasoned investors know when to jump into the stock and the support holding at $72.50 is a positive signal. From there these investors will push the stock slightly higher and then begin to unload it as the stock rises. They are not holding for a full recovery in the stock but selling into the bounce back. Eventually the bounce will end and they will have either unloaded all their shares or certainly not have many left by then. This is why it is important as a small investor to pick those big cap stocks and learn the support levels and when to buy and sell the stock. It is also important as a small investor who sells put options for income, to know the support strikes to sell puts at, when to sell them and when to roll them out for more premium and not down. This is what I did yesterday to take advantage of the put premiums being elevated as the stock broke support at $72.50 for a few minutes in the morning.
Dow Market Direction Chart
The Dow market direction chart shows a similar pattern that is seen often in sideways markets. A big jump in the morning, an early morning high and then a drift sideways. The early morning high and then subsequent lower highs is indicative of the type of investor I have described above. The big jump is caused by the sudden buying of stocks that have been beaten up at the outset in the morning. Then a second wave pushes the indexes to their highs and then a drift as investors start to sell into the big jump up in pricing. For conviction to return we need to see closings above the morning high. In the chart below I have marked the early morning high and indicated that the index needs to close above this high to bring more investors into the market. Until that happens repeatedly, this remains a buy and sell or a trading market.
Microsoft Stock
One of the Dow 30 is Microsoft Stock. Looking at the past three days you can see how the volume has been declining as the stock drifted back below $40.00 to close yesterday at $39.36. Today the buyers pushed the stock back up almost 3% in a matter of an hour and then will start to sell out. The key to watch is volume. On a big move higher the volume level needs to break the previous days of selling. This indicates conviction among investors that the stock will not just recover but will make new highs. They buy into the rally, not sell. Instead what we see today is selling into the rally. This tells us as a small investor to either unload our own shares if we have bought some at lower prices, or to sell some covered calls and keep some of the shares free from covered calls to help rescue those sold at this level, just in case the stock does in fact move higher.
Market Direction Outlook Into The Close For March 28 2014
By following a few steps and watching a handful of key indicators like Volume, we as small investors can learn to enjoy great returns while continuing to protect our capital from losses which is as important as profits. Through understanding support levels in the stocks we follow we can watch volume indicators and understand when buying is going on and wait for that inevitable push higher in those stocks. Then when the push happens, we can look at volume and decide if there is enough conviction and new money coming in to push the stock a lot higher or whether it is simply an orchestrated bounce which we should be selling into. By selling in lots we can take advantage of additional rises in the stock if the rise continues for more than a day or two while at the same time protect ourselves if in fact the rise is no more than a day.
The market we have been in since January is far more typical than 2013 when the direction was straight up. Yet returns in this type of market can be huge if an investor begins to focus on large cap stocks that offer significant protection through well defined support levels and easy trading for profits through both stock and option combinations.
The close today should remain positive. I would expect the Dow to close with hopefully a 100 point gain but the last hour will tell us if there is enough momentum to carry through for Monday. I had written earlier that the market needs to break higher decisively. That can only happen with new capital inflow and that means we need to see a stop to the up and down gyrations to convince investors that the rallies are making headway and the overall direction is up. Until we see that, the best course is to trade the bounces or in my case buy to close naked puts or put credit spreads and when the market dips, buy stock or in my case sell puts against the support levels.
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