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S&P 500 Is Approaching Risky Levels - Here's the Trade

The S&P 500 is approaching risky levels. Book profits on strength in the index to its quarterly risky level at 2,979.6 and 200-day SMA at 2,998.5.

The S&P 500 Index SPX has had a positive weekly chart since April 10. 

And the daily chart shows overhead risky levels where profits should be taken. The levels are its quarterly risky level at 2,979.6 and its 200-day simple moving average at 2,998.5.

The S&P closed Monday at 2,953.9, down 8.6% year to date and in correction territory 13% below its all-time intraday high of 3,393.5, set Feb. 19. 

The index traded as low as 2,191.8 on March 23 and since then it's up a bull-market 35%.

Several factors are moving this market.

The spread of the coronavirus is one. If cases increase, the S&P gets hit. If investors see hope for a vaccine, the index rallies.

The Federal Reserve is pumping the market with new debt. Fed Chair Jerome Powell indicates he has more stimulus arrows in his quiver.

Investors are looking at the V-Shaped bottom for the stock market as a V-Shaped recovery for the economy. I caution on this notion since 36 million Americans have filed first-time jobless claims since mid-April. Some states are still on lockdown.

We are nearing the end of first-quarter earnings season and most companies are not offering guidance. This will make second-quarter earnings a challenge as many companies say they have been hurt by Covid-19.

The Daily Chart for the S&P 500

Daily Chart for the S&P 500

Daily Chart for the S&P 500

Courtesy of Refinitiv XENITH

The S&P 500 had been above a golden cross since April 2, 2019. This is when the 50-day simple moving average rose above the 200-day simple moving average. This buy signal indicated that higher levels would follow.

When a stock or index is above a golden cross, you buy on weakness to the 200-day SMA. This was doable back on June 4, 2019, when the average was 2,774.9.

This buy signal was intact when the index set its all-time intraday high of 3,393.52 on Feb. 19.

The index gapped below its semiannual pivot at 3,303.4 on Feb. 24. 

Investors who were long the market should have reduced holdings as this level was tested on Jan. 16.

The S&P has been below its 200-day SMA since March 5. This led to the crash to the March 23 low of 2,191.9.

On the rebound, the index has been above its 50-day SMA since April 24. 

Now it’s challenging its quarterly risky level at 2,979.6 and its 200-day SMA at 2,998.5.

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The Weekly Chart for the S&P 500

Weekly Chart for the S&P 500

Weekly Chart for the S&P 500

Courtesy of Refinitiv XENITH

The weekly chart for the S&P 500 is positive, with the index above its five-week modified moving average at 2,863.8.

This index is also above its 200-week simple moving average, or reversion to the mean, at 2,671.9.

Its 12x3x3 weekly slow stochastic reading is projected to rise to 57.78 this week from 52.42 on May 15.

Back during the week of Jan. 24 this reading was above 90, putting the S&P in an inflating parabolic bubble formation. Bubbles almost always pop and so did the S&P 500 bubble.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

The second-quarter level was based upon the March 31 closes. The monthly levels for May were established based upon the April 30 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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 past 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.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.