A Critical Look at the S&P 500 -- And the Best Strategy to Play It Now
Weekly momentum has peaked. Are we close to an inflection point for stocks?
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The S&P 500 (SPX) is the most closely watched stock market index in the professional money management world. The Dow Jones Industrial Average (DJIA) is probably the most widely known measure by the public with the the Nasdaq coming up fast.
Let's look at a few charts and indicators to see if we are close to an inflection point for stocks by looking at the SPX.
In the daily Japanese candlestick chart of the SPX, below, I can see what I consider a "risky market" for new longs. The index has traded higher from late October and has been retreating from the upper band of a moving average envelope (these are equal bands above and below the moving average line and not volatility bands).
Trading volume has not expanded on this rally but it has been steady. The daily On-Balance-Volume (OBV) line has moved higher but it has not surged to a new high as prices have recently. This is a minor bearish divergence.
In the lower panel is the 12-day price momentum study. I can see a pattern of lower highs from November. The pace of the advance is slowing and it is a larger bearish divergence when compared to the price action.
Prices have been known to ignore divergences but the upcoming monthly employment report could be an "event" that precipitates increased selling.
We'll see.
In the weekly Japanese candlestick chart of the SPX, below, we can see the latest price action. We alluded to this chart in our 2024 forecast and here we can see an extended market with shrinking volume.
The most recent weekly candle has an upper shadow on a spinning top telling us that traders are rejecting the highs. Weekly momentum has peaked.
Many market watchers pay attention to the advance-decline data (chart below) and its trends. Here you can see that the breadth numbers have been stalled the past four or five weeks.
Bottom-line strategy: The trend is still up but I grow more cautious each day. The best strategy is to raise sell stops until the market reverses to the downside.
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