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There is no talk of a summer rally this year, which means that no one is expecting one. But instead of a contrarian sign, the charts suggest that the lack of Wall Street hype about such a set of developments could well be a sign that trouble is ahead for stocks.
What is certain is that the S & P 500 broke below 900 this week. That's a break below the first key support level. We've been referring to 900 as the key round number support area. What's left now is the 20-day moving average, where the S & P closed on Thursday, and the 50-day moving average, which is near 860. Below that there is another small support level near 850.
A few days ago, we were talking about the S & P challenging resistance levels, with 950 being the last wall before a move toward 1000.
Chart Courtesy of StockCharts.com
The market's lore, which is often nothing more than marketing hype says that sometime in May, there will be a low and that from there the summer rally will begin. But, as we point in "Market Timing For Dummies," anyone with any trading experience knows that the chances of a summer rally are no better than that of a winter rally or any other seasonal rally, except for the odds of a short term rise in stocks at the end of the month and the first five days of a new month, which is a fairly reliable seasonal trading development.
So, if we look at the current market, we can see that the odds of a summer rally are less than usual. First, we know that the market bottomed in March, and that the S & P 500 rallied nearly 40% from March 6, until the recent high on May 8. Since then we've seen two things. First, the market found support at its 20-day moving average once. Then, it rallied, but failed to deliver a new high or equal the May 8 high.
That counts as a technical failure, albeit a minor one for now.
Next, the 20-day moving average is a significant support level that is now being tested. After the March low, the S & P 500 found support at its 20-day average four times before once again finding and breaching the average on 5-21, before closing barely above it on that date.
It's pretty rare for a market to find support at the 20-day moving average more than a handful of times before it finally breaks below it. That's just normal technical behavior. The 20-day moving average is considered short term support.
That means that if the S & P closes below the 20-day moving average today, the burden of proof will be on the bulls, as the level that has held four times previously during this rally will have been breached.
Chart Courtesy of StockCharts.com
Another sign of concern for the bulls is the double top in the New York Stock Exchange Advance Decline Line (NYAD). This indicator has been very reliable in calling major market tops for decades, rarely missing for very long periods of time. The line topped out on May 8, confirming the market's high. Since then it has rolled over, and failed to make a new high. This is a sign that the market is losing momentum.
The Nasdaq Composite (COMPQ), the Nasdaq 100 (NDX) and the Banking Index (BKX) all leaders since the March bottom have also begun to roll over and look tired.
And even though oil prices have rebounded, oil stocks are not doing any better than the rest of the market, suggesting that sellers are starting to gain the upper hand throughout the market.
Conclusion
The indications are that the summer rally isn't coming this year. In fact, unless something changes, it looks as if we've had the summer rally in the spring.
The stock market is starting to show signs of wear and tear and is losing momentum. And as the summer doldrums kick in, the best we can hope for is dull sideways trading, instead of a big decline.
We suggest that investors take a good look at their portfolios and take profits where they have them, or tighten stops. Active traders should start considering the possibility of selling stocks short.
Our sections have been adjusted to reflect this more cautious posture.
Get Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for All Seasons. Also Available As Kindle Books.
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