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Bear Market Returns As The S&P 500 Tests Risky Level Pre-FOMC


Last week the stock market peaked as the S&P 500 tested its monthly risky level for April at 2,944. This occurred as the Federal Open Market Committee (FOMC) released is statement following its meeting.

The problem is that all five major averages are below risky levels without value levels suggesting that May could be a repeat on the March bear market.

Here is the scorecard for the major equity averages

Describing the Weekly Charts

The weekly chart for the Dow Jones Industrial Average is neutral with the average below its five-week modified moving average at 23,846. It is just below its 200-week simple moving average at 23,782. Its 12x3x3 weekly slow stochastic reading rose to 42.97 last week, up from 39.35 on April 24. The Dow is below monthly, quarterly, annual and semiannual risky levels at 25,781, 26,091, 29,964 and 30,361, respectively.

The weekly chart for the S&P 500 is positive with the index above its five-week modified moving average at 2,810.6. This index is above its 200-week simple moving average or “reversion to the mean” at 2,660.5. Its 12x3x3 weekly slow stochastic reading rose to 45.53 last week, up from 41.02 on April 24. Its quarterly, monthly, semiannual and annual risky levels are 2,979.6, 3,068.0, 3.303.4 and 3,466.5, respectively. 

 The weekly chart for the Nasdaq is positive with the index above its five-week modified moving average at 8,349.8. The Nasdaq is well above its 200-week simple moving average or reversion to the mean at 7,078.7. Its 12x3x3 weekly slow stochastic reading rose to 49.08 last week, up from 42.05 on April 24. Its quarterly pivot is 8,559 with semiannual, monthly and annual risky levels at 9,074, 9,177 and 9,352, respectively. 

The weekly chart for the Dow Jones Transportation Average is neutral with the average below its five-week modified moving average at 8,336. The average is way below its 200-week simple moving average or reversion to the mean at 9,864. Its 12x3x3 weekly slow stochastic reading rose to 31.33 last week, up from 28.74 on April 24. Transports set its all-time intraday high of 11,623.58 back on September 14, 2018. Its monthly, quarterly, semiannual and annual risky levels are 9,220, 9,269, 12,155 and 12,755, respectively. 

The weekly chart for the Russell 2000 is neutral with the average below its five-week modified moving average at 1,265.11. It is well below its 200-week simple moving average or reversion to the mean rose to 1,477.73. Its 12x3x3 weekly slow stochastic reading rose to 31.37 last week, up from 28.31 on April 24. The small-cap index set its all-time intraday high of 1,742.09 back on August 31, 2018. Its quarterly, monthly, semiannual and annual risky levels are 1,424.48, 1,448.21, 1,831.9 and 1,910.58, respectively. 

How to use my value levels and risky levels:

The closes on December 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 level was based upon the March 31 closes. The monthly levels for May were established based upon the April 30 closes.

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.

Want to learn how to integrate trading levels into your everyday trading strategy? Check out my new publication, 2-Second Trader.

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