The market direction outlook for Thursday was a sideways market with a bias to the downside. Indeed part way through the day the Dow was down over 70 points. Meanwhile the S&P 500 and the NASDAQ were also lower. A lot of this decline though was brought about by the earnings from Caterpillar earlier this week and GM today which saw its income trimmed by 16 percent despite beating analysts reduced earnings outlook. So far the earnings have been mixed this quarter which is keeping investors nervous. While stocks can move higher on enthusiasm, all investors know that sustained higher prices have to be held up by better overall revenue. This is the same problem we have seen in the last quarter as well.
The market direction is overbought although that is being worked out daily now as the market meanders daily. The buying interest in today’s pullback brings in memories of the “buy the dip” crowd which was so successful from January to May when each little pullback was met by buyers.
On the economic front, U.S. durable goods orders for June surged 4.2 per cent, after running up 3.7 per cent in May but these strong gains were almost completely due to the transportation sector. Overall what we are continuing to see is very modest growth at best and this continues to challenge investors who are caught in a game of hot potato. They all want to be in the market but none want to be holding should stocks pull back more than anyone expects.
Market Direction Action for July 25 2013
The market direction action can be seen in the daily 1 minute chart of the S&P 500 below. The morning opened with a drop in the S&P. I have marked this as the 1st drop. A rally back was met by more selling pressure which while lower than the 1st drop did not push much lower. This obviously impressed investors who took the low volume of the 3rd drop as a signal that there was no more downside for the time being and traders stepped in, picking up stocks.
Facebook Stock
The 24% jump by Facebook Stock to close just over $33.00 gave some life to the day and bargain hunters helped to push the S&P 500 to close near the highs for the day, which is a bullish sign.
While in the chart the recovery from the morning selling may not seem too special, it is a good sign for bullish investors and a strong recovery from the morning selling. This continues to demonstrate the strength within this market direction up.
Market Direction Closing For July 25 2013
The S&P 500 closed at 1,690.25 up 4.31. The Dow closed at 15,555.61 up 13.37. The NASDAQ closed at 3,605.19 up 25.59.
Market Direction Technical Indicators At The Close of July 25 2013
Let’s review the market direction technical indicators at the close of July 25 2013 on the S&P 500 and view the market direction outlook for July 26 2013.
The Market Direction Technical Analysis is still showing that the overbought condition is continuing to weaken the uptrend.
For Momentum I am using the 10 period. Momentum on Thursday continued under heavy pressure and is sliding lower. It is ready to move negative although today’s close was stronger than expected but the morning selling impacted momentum.
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 buy signal on July 5. The buy signal also continued to weaken on Thursday but again it is important to realize that MACD is showing that the market direction remains up.
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 positive but is flattening out. While not the most ideal pattern, it still indicates the underlying strength in the market.
Rate Of Change is set for a 21 period. The rate of change is positive but pulling back. I indicated yesterday that often when the rate of change has signals such as yesterday’s high reading that it is often followed by weakness. We saw that weakness today and the Rate Of Change indicator reflects that.
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 the Slow Stochastic remains overbought. This tells us that the start of next week could see some selling. Friday’s reading will give us a better indication.
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 for tomorrow and it reflects the extreme overbought condition of the market.
Market Direction Outlook And Strategy for July 26 2013
The stalling of the market direction remains the key to working out the overbought nature without impacting stocks heavily. This overbought nature is also creating good opportunities for those investors doing the Trading For Pennies Strategy trade. Today was another good example. The third push lower and then the recovery signaled that the trade should be looked for to the upside. I have an article going into the members section this evening that discusses trading the trend with the Trading For Pennies Strategy trade.
So while it would appear that the market direction seems possibly concerning, there are actually lots of signs that there remains enough strength in this market to keep it in a tight range with a bias up some days and down others. In other words a neutral market.
The market direction technical indicators are in general still positive but they are still reflecting an underlying weakness due to the overbought condition the market is working out. Therefore the market direction indicators are reflecting sideways with a bias down for tomorrow but still up in general. While this may seem odd what it is telling those of us who like to trade within options that we should be using the period to seek out trades that meet our criteria whether Put Selling or doing put credit spreads as the overall bias is more up than down. With the underlying strength in the market direction remaining, I am very cautious to trade through selling calls. I would not bet against the market direction higher until there are clearer signals that the uptrend will end and a pronounced move lower is in the works.
You can see this in my market direction portfolio where I am still holding the UDOW and keeping a somewhat wider stop-loss to accommodate any short-term selling. I don’t mind being stopped out of the market direction portfolio but I want to be in this market if it does push higher as often when a market drifts sideways such as we are seeing now, it can surprise strongly to the upside.
So in short, I am busy Put Selling and looking for opportunities among my favorite stocks and I am not very concerned about the overall market direction presently.
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