Market Analysis

The Golden Key

golden keyDespite the large February – April rally stocks are down year over year (May 6 2015- May 6 2016). $SPX is down over 1%, the Nasdaq is down over 4% and small caps are down over 8%. On May 6 stocks closed basically where they were in the third week of March which implies they haven’t really gone anywhere in the past 7 weeks.

And not going anywhere has really been the theme since QE3 ended. So this period of consolidation remains completely unresolved, literally stuck in the middle:


As I’ve outlined recently ultimately this range will resolve itself into a big move once a directional breakout has confirmed itself.

We are closer to all time highs than any recent lows and with yet another OPEX period coming bulls likely have again the horn to make magic happen, after all, OPEX retains an almost perfect track record of pre-programmed buying:


There are exceptions of course. Both Januarys in 2015 and 2016 were OPEX busts and so was August of 2015. If anything August showed how quickly the bid can disappear.

So here we are in May of 2016 and we can observe an almost perfect replay of last year. A rally into the upper Bollinger band, a retrace back toward the lower Bollinger band and 50MA just in front of OPEX. Will the program just replay itself? After all new time highs were made in May last year.

Still something happened on Friday that has happened only twice in over 20 years on the $SPX: The weekly 100MA has crossed over the weekly 50MA. Only by 1 handle mind you, but it has happened.

The last two times this happened carnage followed:


Both of these crossovers happened in context of the following events:

  1. SPX had broken a multi-year ascending trend line
  2. GAAP earnings were declining

Both of these conditions are in place here as well.

However, given the consolidation of price over the past year and a half it is also relevant to point out that a similar consolidation occurred in the mid 1990’s which resulted in a massive price move toward the upside. The big difference to then: GAAP earnings were rising. They clearly aren’t now.

The conclusion to all this: Bulls can’t afford any further price decrease here because it would confirm the MA cross-over and likely set in motion a larger corrective move inviting new lows altogether. This is at least the track record.

So this next 2 weeks into OPEX may hold the golden key as to the ultimate directional move of this market.

Buckle in.

Categories: Market Analysis

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26 replies »

  1. Great post. Daily stochastics on the $SPX is oversold, but weekly stochastics is overbought and already pointing down. It will be very interesting to see how things play out.

  2. An interesting point to note, we reclaimed both MAs this time at th cross and the last 2 time, we didn’t. Conflicting signals.

  3. Nice post as always… and just to throw in my opinion, we are going down to 185 area on the SPY into mid-late June (1850 SPX), and then rally one more time into late July, early August before we crash in the fall into October.


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