S&P 500 Has Momentum and Isn't Overbought - Here's the Trade

The S&P gapped higher on Friday and appears on track to test its semiannual risky level. Here's how to trade it.
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S&P 500 Index SPX has had a positive weekly chart since April 10. 

The daily chart shows that the index has moved above its quarterly pivot at 2,979.6 and its 200-day simple moving average at 3,007.8.

The S&P gapped higher this morning and appears on track to test its semiannual risky level at 3,303.4. 

If the momentum continues, the upside could fill the price gap to its Feb. 21 low of 3,328.4. 

The annual risky level at 3,466.5 would be above the all-time intraday high of 3,393.52, set on Feb. 19.

The S&P traded as high as 3,211.72 before noon today. This had the index down only 0.6% year to date and 5.4% below the all-time high. 

SPX traded is up 47% from its March 23 low of 2,191.8.

Let's look at the charts to see where the trade is.

The Daily Chart for the S&P 500

Daily Chart for SPX

Daily Chart for SPX

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 an index is above a golden cross, you buy the market 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.

A death cross formed on March 27 after the index set its March 23 low.

During the V-shaped bottom, the S&P crossed its 50-day SMA on April 27. Then came the 200-day SMA on May 26.

From high to low the SPX gapped below its semiannual pivot at 3,303.4 on Feb. 24. On the rebound the quarterly pivot at 2,979.6 became a value level on May 27.

On June 2, the S&P moved above its monthly pivot at 3062.1.

The upside now is back to the semiannual pivot at 3,303.4.

The Weekly Chart for the S&P 500

Weekly Chart for SPX

Weekly Chart for SPX

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 2,958.5.

This index is also above its 200-week simple moving average, or reversion to the mean, at 2,681.3.

Its 12x3x3 weekly slow stochastic reading is projected to rise to 74.24 this week from 65.26 on May 29.

The Trade: Buy SPX on weakness to the monthly and quarterly pivots at 3,062.1 and 2,979.6. Reduce holdings on strength to the semiannual risky level at 3,303.4.

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 last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close.

The monthly level for June was established based upon the May 29 close.

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 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.

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.