The SPDR S&P 500 ETF (SPY) - Get Report , known as "Spiders" by active traders, set its all-time intraday high of $294.95 on Wednesday in anticipation that the FOMC would make the case for cutting rates. Spiders faded lower when Fed Chair Jerome Powell took this notion off the table. My call is to sell Spiders up to its quarterly risky level at $297.56. The downside risk is to its monthly value level for May at $266.58.
The adage "sell in May and go away" is based on a well-known global financial belief that stocks tend to slump in the summer months then turn around in October. This call is never a sure thing, and this year two major Wall Street firms are saying the opposite. Morgan Stanley and Bank of America are telling clients to look for a surprise jump in the stock market, calling it a "melt up" on a positive momentum shift. My weekly chart is showing a pattern like the highs set in October. I call it an "inflating parabolic bubble" and spiders are showing this pattern now.
The Daily Chart for Spiders
Courtesy of Refinitiv XENITH
The daily chart for Spiders shows a bear market decline of 20.4% from the Sept. 20 high of $293.94 to the Dec. 26 low of $233.76. The technicals turned on a dime on Dec. 26 with a daily "key reversal" when the close of $246.18 on Dec. 26 was above the high of $240.84 on Dec. 24. This signal indicated that 2019 would begin as a positive market for stocks.
The close of $249.92 on Dec. 31 was an important input to my proprietary analytics and semiannual and annual levels remain in play at $266.14 and $285.86, respectively. The close of $282.48 on March 29 was another input to my analytics and the quarterly risky level at $297.56 remains as the upside target though June. The April 30 close at $294.34 was the latest input to my analytics and the value level for May is $266.58.
The Weekly Chart for Spiders
Courtesy of Refinitiv XENITH
The weekly chart for Spiders is positive and extremely overbought with the ETF above its five-week modified moving average at $286.54. SPY is well above its 200-week simple moving average or "reversion to the mean" at $240.82 after this average held at $234.71 during the week of Dec. 28. The 12x3x3 weekly slow stochastic reading is projected to end this week at 95.42, well above the overbought threshold of 80.00. With the reading above 90.00, Spiders are in an "inflating parabolic bubble" formation -- and bubbles always pop.
Trading Strategy: Reduce holdings on strength up to its quarterly risky level at $297.56. Traders can buy weakness to its annual pivot at $285.86. Investors can rebound positions on weakness to its monthly and semiannual value levels at $266.58 and $266.14, respectively.
How to use my value levels and risky levels:
Value levels and risky levels are based on the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored into it. To capture share price volatility, investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.
How to Use 12x3x3 Weekly Slow Stochastic Readings:
My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years. The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low vs. the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best. The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold. Recently I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also call a reading below 10.00 as being "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.