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The S&P 500 – To Melt-Up From Meltdown, and How to Trade It

The chart dynamics indicate that the bull market for Spiders that began from the Dec. 26, 2018 Christmas low will end with a Dec. 26, 2019 Christmas top.

A year ago, the S&P 500 was in a Christmas meltdown. This year it’s a Christmas melt-up which could end with new highs. The S&P 500 Index is traded using the SPDR S&P 500 ETF Trust SPY, known as Spiders. The chart dynamics indicate that the bull market from the Dec. 26, 2018 Christmas low will end with a Dec. 26, 2019 Christmas top.

Here's what the daily and weekly charts will show

  1. A year ago, the weekly slow stochastic reading for Spiders was oversold. Today it’s extremely overbought with a reading above 90, which defines an “inflating parabolic bubble” formation.
  2. Fear loomed a year ago! Greed rules today! The fear of missing out causes investors to buy at the top. A year ago, investors were forced to sell due to margin calls.
  3. At the Dec. 26, 2018 low, the Spiders confirmed a bear market correction of 20.4%. Weakness held its 200-week simple moving average or “reversion to the mean,” and Dec. 26, 2018 was a “key reversal” buy signal.
  4. If Spiders peak on Christmas this year, the decline to its 200-week SMA will be a bear market decline of 20.2%. This is the warning I am charting today.

Spiders closed Friday at $320.73, up 29.3% year to date and in bull market territory 37.2% above its Dec. 26, 2018 low of $233.76.

The Spiders ETF is Stretching to New Highs for Christmas

The Spiders ETF is Stretching to New Highs for Christmas

Courtesy of Refinitiv XENITH

From left to right, the daily chart for Spiders shows the 20.4% decline from the Sep. 20, 2018 high of $293.94 to the Dec. 26 low of $233.76.

This chart confirmed a bottom on Dec. 26 with a technical buy 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. This set the stage for a 2019 rally to at least its annual risky level at $285.86 which was tested on April 1.

Spiders moved sideways from April 1 into Oct. 3 as $285.86 was an annual pivot or a magnet. During the second half of 2019 the semi-annual pivot at $294.72 became a magnet between July 1 and Oct. 10. Then came an upside gap above $294.72 as the momentum began to drive the ETF higher.

The fourth-quarter pivot at $306.76 became a magnet between Nov. 4 and Dec. 3. The monthly pivot for December at $311.64 was a breakout level on Dec. 6.

Levels from my algorithms thus provided the stepping stones to the all-time intraday high of $321.97 set on Dec. 20. This week’s risky level is $326.36 which I project will be the optimum Christmas high.

The Weekly Chart for Spiders

When the 'Inflating Parabolic Bubble' Pops, Spiders will decline by 20%.

When the 'Inflating Parabolic Bubble' Pops, Spiders will decline by 20%.

Courtesy of Refinitiv XENITH

The weekly chart for Spiders is positive but extremely overbought, with the ETF above its 5-week modified moving average at $314.03. 

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SPY is well above its 200-week simple moving average, or “reversion to the mean,” at $257.48. This average held at $234.71 during the week of Dec. 28, 2018 as a buying opportunity.

The 12x3x3 weekly slow stochastic reading ended last week at 95.77 up from 95.21 on Dec. 13. This reading has been above 90 since the week of Nov. 22 as the “inflating parabolic bubble” began.

Trading Strategies: Reduce holdings on strength to this week’s risky level at $326.36. 

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.”