My last market direction call was on July 1 in which I indicated there was probably going to be some market direction weakness, but overall market direction is now up. The big up move on June 29 changed the market focus for the mid-term.
Since that day the market timing indicators have continued to climb. While there has been weakness the market timing indicators continue to reflect that there is enough strength in the overall market direction to push the market probably to at least 1400 on the S&P. The NASDAQ market has done particularly well over the past three trading sessions and is back moving higher as technology stocks move once more into favor with investors. This is a good sign for overall market direction indicators as the NASDAQ has led much of the market recovery from the 08-09 bear.
Market Direction Goals and What I Am Watching For
My market direction goals are pretty simple at this stage. I believe the S&P can break into 1400. From there the S&P needs to push to 1405 to break the May 1 high. It then must hold above that level. If the S&P cannot break 1405, then the market direction will change back to down. It is important to remember that the market correction despite all the hoopla in the media and doom and gloom, has not been severe on the indexes. Certain stocks have fallen making them more attractive but overall this remains a normal correction in a bull market. Until that changes the market is still in a bull phase. The market correction last summer was far worse and entered bear market status by August.
Therefore, if the market direction cannot push to break the May 5 highs, then the stock market direction will return to the trading range which presently sits between 1300 on the downside and 1400 on the upside. There is plenty of income to be made with a market stuck in a market trading range. In fact for those of us who love selling options, a range bound stock market is a thing of beauty.
Pick A Handful of Large Cap, Dividend Paying Stocks For Market Direction Moves
To benefit from a range bound stock market, you want to pick a handful of quality large cap stocks that preferably pay dividends. Then plot those stocks as the market direction moves up and down. As long as the stock market stays within the defined range, sell puts against the large caps when they fall and buy those puts back when the large caps rise. If the stock market range holds, sell naked calls when your large cap stocks rise and buy those naked calls back when the stock pulls back with the market direction trend.
The stocks on my website are among the handful of stocks I follow and as you can see from the various trades and my articles, when these stocks have pulled back along with the stock market direction down, I have sold puts. When the stock market direction changes back to up, I buy back those puts and sell naked calls. Right now I am waiting for the market to give a clear indication it can break 1405. If it cannot, then I will be selling naked calls as the overall stock market direction pulls back.
Market Timing Indicators And Trading Large Cap Moves
The fast stochastic is a great tool to use for this simple strategy. It predicts short-term, one or two-day market moves which is excellent for timing put selling or selling naked calls. The ultimate oscillator is excellent for market timing the overbought and oversold indications on the overall stock market direction. The slow stochastic looks out beyond a couple of days. Once it shows weakness then the trend is going to move down. When it shows strength, the overall market direction trend will be up.
It seems very simple but these are the tools I use everyday and most of these are the tools I used in past range bound markets. In the 1970’s the overall market direction was a gradual improvement, but it took most of the decade for the market direction to improve. Today with the world’s economies stuck in an enormous debt rut, individuals stuck with huge debt loads and baby-boomers retiring everywhere in the developed economies, investors could easily see a similar market for the next few years.
Market Direction Predictions
The media has been filled with market direction predictions of sluggish growth and then by 2015 the S&P hitting anywhere from 1700 to 2500 or 700 on the downside. My stance is, no one knows long-term market direction. I can use my market timing indicators for short-term momentum strategy trades, but looking out beyond 6 months to a year is difficult at best. Looking beyond 6 months to some of the wild predictions I have read for the coming years make me shake my head. No one knows and with so many problems in the developed nations I can only look at my market timing indicators to gaze out a few days or a week at best.
But It Does Not Matter Because I Sell Options
Because I sell option it really matters little where the market will be in 6 months to a year. As an option seller, I look at individual stocks, study their trade patterns and their balance sheets and make my trades based on shorter term outlooks. That is the most beautiful thing about my strategy and method of investing. If the stock market should collapse in coming months I will be there with my boatload of cash to buy stocks. If the market should stay weak and range bound, I am there selling options on my favorite stocks. If the market moves higher I am selling options against rising stocks. Whipsawing and wild swings only add to volatility which drives up option premiums. What could be better than investing in this kind of climate.
Market Timing Indicators Going Into The Rest of The Week
Tomorrow is the big employment numbers and right now the market is simply sitting sideways waiting for tomorrow. Personally I am expecting a slightly better number than the 75,000 being quoted in the media. I am expecting probably 100 to 125 thousand more employed. Not enough to move the unemployment number but enough to see a gap open tomorrow.
My market timing indicators from July 3rd show that everything continues to point higher and to being overbought. Being overbought brings weakness but is also a great sign of strength in a rally as investors are buying every little dip in their favorite stocks. This keeps the overbought indicators high but provides a base for the market direction to try to push higher.
Remember, the correction is not severe. Therefore pushing higher is going to be a struggle. If the market correction had been below 15%, any rally would have seemed more impressive. With a 10% correction and then the big gain on June 29, much of the correction has been recovered. From here it is a matter of tough slogging to peddle the market higher.
Market Direction Summary As We Await The Employment Numbers
The market direction sitting sideways will only last today. The employment numbers tomorrow will be the next catalyst either higher, which is what I am expecting, or lower if the numbers disappoint. Based on the more recent numbers like ADP I doubt the numbers are going to surprise to the downside. Therefore I am expecting a gap up tomorrow and higher prices moving into next week. I don’t see any way to successfully play the employment numbers this time for big profits as June 29 was the big up day. Tomorrow’s gap open, if it happens, will not be huge. By putting in place a straddle or strangle, the costs are too high when purchasing both sides to have much reward for the risk to capital. If we were lower in the market it would be a great trade but with the market already recovered by half, the market gap open tomorrow that I expect should only move SPY CALL option premiums perhaps half to one percent. But I am not a gambler and buying calls hoping I am right, without any protection is just not something I do.
I believe market direction will remain higher for the coming week as the market decides whether to test the 1405 level. There will be lots of opportunities for profits in coming days, weeks and months. Missing out on the employment numbers as a trade does not concern me. Risking my capital on a gamble always does. In the big scheme of investing over a long period of time, one trade does not make a portfolio like mine. It’s all the little successful trades based on market direction and market timing calls, that compound my capital. It’s a strategy I hope many other investors will consider as well.