Market Direction today exhibited all the flair of an oversold market. In yesterday’s market direction outlook I discussed the overall trend of the market as it closed yesterday at the 50 period moving average. This is key support for the market and marks a normal corrective action. The question on most investor’s mind then is whether the reversal today will hold or if it simply a bounce from an oversold market. On Wednesday I indicated that I thought Thursday would see a bounce but that the overall direction was lower and that any bounce would be suspect. Indeed the selling in the morning on Thursday was pronounced as it drew many stocks into a larger move lower. But the breadth of the market by 12:30 was almost 60% of stocks down but by the close 71% of stocks were advancing.
Key Reversal of Market Direction
Reversal days are always exciting. Below is the 5 minute time chart for June 6 on the S&P 500. In the morning the market direction failed to pull back until shortly before 12:00 when the first serious pullback occurred. After a short rally a second pullback failed to break the low of the first pullback and that buoyed investors who commenced buying stocks which had fallen earlier in the morning. By the close the S&P had climbed 13.66 points or 0.85%. This is not a small feat considering that the market direction when it broke just before 12:00 and started to fall, had the talking heads on MSNBC talking about collapses and bringing out more bear analysts.
The first break cracked 1600 on the S&P but the second break broke to a low of just 1599.41 before commencing a recovery. These types of numbers such as 1600 may not seem like much to a lot of investors, but for many traders they are important milestones and when the S&P 500 broke through with the first pullback and then recovered, traders were waiting to see if 1600 would hold. When it did, they started buying.
Oversold Market Direction
The market direction was heavily oversold on Thursday and if we look at the past month you can see that today’s action witnessed the break of the 50 period exponential moving average (EMA) and then a bounce back for the market. It now must recapture the 20 period EMA and continue to push higher. The last correction in April which took the S&P back to the 50 period moving average was
April Market Direction Correction
The last market direction correction was in April. You can see that correction in the daily chart below. At point A on April 18 the markets fell and closed right on the 50 period EMA. The following day Point B, market direction shifted and the markets closed back above the 50 period EMA. From there the markets recovered the 20 period EMA and kept climbing.
This time we have seen a similar pattern. At point C June 5, the market direction collapsed back to the 50 period EMA and then today, June 6 (Point D) the market direction reversed and closed above the 50 period. Tomorrow could see the market direction push higher and hold the 20 period if the non-farm payroll numbers are decent.
Market Direction Closing For June 6 2013
The S&P 500 closed at 1,622.56 up 13.66 points. The Dow closed at 15,040.62 up 80.03 points and recapturing 15,000 on the Dow. The NASDAQ closed at 3,424.05 up 22.58 points.
Market Direction Technical Indicators At The Close of June 6 2013
Let’s review the market direction technical indicators at the close of June 6 2013 on the S&P 500 and view the market direction outlook for June 7 2013. 
For Momentum I am using the 10 period. Momentum has been collapsing since a peak was set on May 15 for momentum. Today however momentum while still negative has turned back up in a fairly substantial way. This could signal the start of a push back or simply a big jump from being heavily oversold.
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 sell signal on May 24. The sell signal is still valid and the MACD reading is lower today despite the market direction reversal.
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 negative but it did reverse part way through the day from being lower to moving back toward positive territory.
Rate Of Change is set for a 21 period. The rate of change is still negative but is close to turning positive. This reflects a lot of buying interest among investors.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is extremely oversold and signaling that the market direction is lower but the readings between K period and D period are so close that the signals are still more neutral than down or up.
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 extremely oversold still and now signaling market direction is up.
Market Direction Outlook And Strategy for June 7 2013
Today could be a key reversal day. Investors have to ask though, what will drive stocks to new highs. No matter how strong the reversal, it may only last a day or even two unless there is a catalyst that can push stocks a lot higher. Without the ability of the market direction to recover momentum to the upside, we could be seeing just a bounce from a very oversold reading.
The Market Direction Technical Analysis is showing a market direction at a crossroads although MACD is decidedly bearish and continues to indicate that trades should be focused more on the downside than upside.
To the downside we have to ask what could push stocks a lot lower. While the recent quarter did not have stellar revenue, earnings were not too bad. Therefore aside from the Fed worries what could be the driving force behind stocks pushing below the 50 period EMA? One thing that could cause it is simply not being able to move higher. There must somehow be a further catalyst to drive the market direction beyond the most recent highs. That is the only thing that can keep the market from correcting and moving into the summer months, stocks are facing the poorest months of the year.
My bias is to the downside but as I sell puts and covered calls I have a distinct advantage of being in large cap stocks that keep producing income for me and allow me to establish strategies of smaller option positions at key support levels for profits while holding large amounts of cash to the sidelines to take advantage of opportunities should they develop.
If the market direction moves higher I will be right there Put Selling rising stocks. If the market direction should continue lower, I will be there Put Selling declining stocks. Either way I am in the market no matter what the direction. For tomorrow then if the non-farm payroll is decent I believe the market direction could push higher, but any kind of disappointment and the market direction may take out the 50 period moving average. I will not be surprised if the S&P 500 tries to pullback but as long as it fails to fall more than 5 or 6 points, I do believe the bias will change to the upside at least for a few days into next week. Friday should be an interesting day with non-farm payroll probably dictating the overall market direction.
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