Spiders ended November at $314.48, up 26% in 2019. The security set its all-time intraday high of $315.48 on Nov. 27.
The problem is that its 12x3x3 weekly slow stochastic reading ended the month at 93.67, well above the 90 threshold on a scale of 00.00 to 100. I define this pattern as an inflating parabolic bubble, and when this occurs, the ticker usually declines at least 20% over the next three to six months.
My call is to sell strength above its monthly pivot for December at $311.64, up to this week's risky level at $319.53. The downside risk is to quarterly, semiannual and annual pivots at $306.76, $294.72 and $285.86, respectively.
History is poised to repeat. When the Spider set its 2018 high of $293.54 on Sept. 20, 2018, the index had a weekly stochastic reading of 91.12. The decline to its Dec. 26, 2018, low was a bear-market decline of 20.3%. When a stochastic reading exceeds 90, it's time to reduce stock-market holdings by at least 50%.
Here's how the technical signals tracked Spiders for the first 11 months of 2019.
The Daily Chart for Spiders
Courtesy of Refinitiv XENITH
From left to right, the daily chart for Spiders shows the 20.3% decline from the Sept. 20, 2018, high of $293.54 to the Dec. 26 low of $233.76.
This chart confirmed a bottom on Dec. 26 with a technical signal called a daily key reversal. This signal occurred as the index set its cycle low on Dec. 26, then closed above the high of Dec. 24. Financial TV channels missed this call as they focus on closing lows not intraday lows.
The close of $249.92 on Dec. 31 was an important input to my proprietary analytics and an annual risky level formed at $285.86. This price target was first tested on April 1 and then became an annual pivot. This pivot was a magnet between April 1 and Oct. 3 and became a value level at which to buy.
The close at $293 on June 28 was another important input to my analytics. This resulted in the second-half pivot at $294.72, which was a magnet between July 1 and Oct. 10. The price gap above that level on Oct. 10 was a technical breakout targeting new highs.
The close of $296.77 on Sept. 30 was an input to my analytics that established the fourth-quarter risky level or price target at $306.76, which was tested on Nov. 4. Strength above this level began the trek to overbought stochastic readings on the weekly chart below.
The close of $314.33 on Nov. 29 was the input that resulted in the monthly pivot for December at $311.64, which is today's magnet. Above the chart is this week's risky level at $319.53, which exceeds the all-time intraday high of $315.48 set on Nov. 27.
The Weekly Chart for Spiders
Courtesy of Refinitiv XENITH
The weekly chart for Spiders is positive but overbought, with the ETF above its five-week modified moving average at $307.51.
SPY is well above its 200-week simple moving average or reversion to the mean at $255.54 after this average held at $234.71 during the week of Dec. 28.
The 12x3x3 weekly slow stochastic reading is projected slip to 93.16 this week down from 93.67 on Nov. 29, still well above 90 as the inflating parabolic bubble continues.
Trading Strategies: Buy weakness to the quarterly, semiannual and annual pivots at $306.76, $294.72 and $285.86, respectively, and reduce holdings on strength above the monthly pivot at $311.64 up to the weekly risky level at $319.53.
How to use my value levels and risky levels:
Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play.
The close at the end of June 2019 established new monthly, quarterly and semiannual levels. The semiannual level for the second half of 2019 remains in play.
The quarterly level changes after the end of each quarter so the close on Sep. 30 established the level for the fourth quarter.
The close on Nov. 29 established the monthly level for December.
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 in.
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 versus 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.