The big market direction up move today came with the Fed’s announcement of basically what amounts to a QE4 program where bond-buying will be increased to 85 billion a month to keep interest rates low, try to assist unemployment and keep the fragile housing recovery growing. But the bigger news came with the Fed announcement that it will tie the present historic low-interest rates loosely to the unemployment rate and inflation rate. Bernanke is looking for unemployment to be at 6.5% or inflation at 2.5% before considering raising interest rates. I wrote an article about this earlier today so I won’t go into it here. You can read that article through this link.
The market direction which initially was up, stalled and then plunged as it became apparent that by and large these are guidelines only, and then Bernanke indicated that monetary policy cannot overcome any effects from a failure to resolve the fiscal cliff budgetary problem. By and large while the stock markets have become pretty used to the Fed announcements and Quantitative Easing, the effect longer term to stocks will, I believe, remain supportive of stocks. So even though we may see some selling following the Fed’s announcement, which has been the pattern in the past following such news, I believe any action that provides liquidity will assist stocks.
I believe the economic problems facing much of the globe will not be “solved” in a matter of a few years. In 2008 when the financial crisis really caught investors ‘ attention I indicated I would not be surprised if it took 10 years before the economies started to progress and return to what passes for normal. We are now into just the fourth year of a recovery effort. It will take more time in my opinion, but as an investor I look for profit in every market condition. The oil embargo crisis of 1973 to 74 took almost 6 years to see a full recovery and that was not a financial crisis. The gentleman who mentored me told me that often the worst stock markets are the most profitable and that it was important to learn to invest in all types of markets. From his advice I was able to devise strategies to assist in a variety of market conditions.
Fiscal Cliff And Market Direction
There are not many days left for an announcement on a resolution to the so-called fiscal cliff issue. If there is no resolution I expect some heavier selling. But at some point even if this issue is not resolved, politicians will realize that they must provide solutions to the severe economic issues facing the United States. The Tarp Bill for example was initially turned down by Congress and then later passed.
If there is a resolution I would expect a bounce higher in the markets as a relief rally of sorts from investors.
But if there is no resolution before the end of the year, investors holding profitable positions may want to look at the S&P 500 chart for the last month and consider using the S&P 500 as a stop. For example, the first stop around 1415 might be a good place to sell some positions and raise cash levels if the S&P should fall that low. The second level is around 1400 which again investors could consider for selling a few more shares. The third level is around 1385 and the fourth level at 1350. By 1350 depending on the strength of a decline to that level, investors may want to move aside and wait out any further repercussions of the fiscal cliff not being resolved.
Using the S&P market direction as a stop-loss for profit taking in the event of a decline.
While I am not expecting a non-resolution, I always believe it is best or have a plan or a strategy in place for that “just in case” scenario. Using the S&P 500 recent levels should assist in any fallout from worried investors.
A similar trade could be done from each of the levels as well including buying inverse ETFs or Hedge ETFs or even Spy Puts at each of the four levels. While on one hand investors could be selling stocks on any serious pullback, they could also be buying inverse ETFs to generate profits on the way down. I know that this is what will be happening with the Market Direction Portfolio.
Market Direction Technical Indicators For Dec 12 2012
Let’s look at the close of the market on December 11 to see where market direction will be for tomorrow.
For Momentum I am using the 10 period. Momentum is still positive but lower than yesterday.
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) is still positive and is higher than yesterday despite the sell-off during the day.
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 falling but still positive.
Rate Of Change is set for a 21 period. Rate Of Change is still positive and higher than yesterday.
For the Slow Stochastic I use the K period of 14 and D period of 3. The Slow Stochastic is overbought and is now indicating market direction is lower.
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 also overbought and it too is signaling that the market direction is changing to down.
Market Direction Technical Indicators Dec 12 2012
Market Direction Outlook And Strategy
The market direction outlook or tomorrow is for the market to possibly try to climb but to turn lower. This is understandable after yesterday’s market breakout. While the Fast Stochastic and Slow Stochastic market timing technical indicators are signaling market direction is down, MACD is not concerned and continues to signal that the underlying trend is higher. The market direction is under pressure as much of the market is overbought. This move lower is an opportunity I will use for more Put Selling on my favorite stocks. With the underlying trend now higher it is not surprising after such a nice move higher for the market direction to rest and pull back for what might be a few days. But any pullback I will be using for Put Selling and looking for other opportunities as well.
Market Direction then for tomorrow is for the market to pull back.
Internal Market Direction Links