Everyone knows that September is the worst month for stocks. I was going to run a few tests to illustrate this, but there is already so much written about this seasonality that it would be a waste of time. Instead, I thought it would be fun to get back to my roots with a little good old fashioned technical analysis.
The chart above shows several factors that should be a concern for anyone not looking for a correction. Starting from the bottom of the chart and moving up, MACD is showing that the momentum is waning. Therefore, some sideways and downside action is likely. Note the similar MACD formation in May.
Of the most concern was that volume swelled today. While a volume signal may take days or even weeks to come to fruition, it should not be ignored. As traders return from summer vacations and the rookies at the turrets are replaced by the professionals, it will be critical to see whether volume returns to push the upside or the downside moves. Today is a warning bell whose ringing should remind everyone to watch the volume.
There are multiple layers of support near 975: Watch the rising trendline, the support line, the 50 day simple moving average, and don’t forget the fact that markets like nice numbers like 975.
Moving on to the top of the chart, RSI2 is showing the market to be short-term oversold, so bounce plays should be considered. Careful though, RSI2 has not been very effective for market-timing the SPY in 2009. I’m expecting any bounce to get sold, which will setup another head and shoulders top.
Many traders will be watching the rising trendline and 975 support as well as the 50 day simple moving average. My advice is contrary to the traditional sentiment, which says to wait for a trendline break before getting short. Instead, any bounce over the next few days to a week should be used to establish short positions in expectation of a test of support and the 50 day average. Should these areas hold, cover shorts and look long again. I think forecasting is just guesswork, but as long as everyone knows it is just guessing, I’m going to say that September will offer a multi-week opportunity for holding shorts, meaning I’m expecting the trendline to get broken.
Regardless of whether there is a significant correction or not in September, volatility has been non-existent, and so I’m looking for a lot more up-and-down action than we’ve seen over the past five months.
I included the SPY chart above as it clearly shows today’s swell in volume. Again, the largest volume since the beginning of the rally coming in on the downside is an important development.
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