Seasonal MACD Update: Market Struggling to Gain Traction By: Jeffrey A. Hirsch & Christopher Mistal | April 18, 2017 | Email | Print

So far this year, Wednesday is the best performing day of the week for S&P 500, advancing 11 out of 15 times. We do not apply a great deal of weight to this accomplishment as research in the Stock Trader’s Almanac (STA) has repeatedly demonstrated that the beginning and ends of days, weeks, months and years tend to hold greater significance and Wednesday is nearly always the third trading day of the week, unless Monday was a holiday.

 

On page 143 of STA 2017 the 23 bears years – 1953, ’56, ’57, ’60, ’62, ’66, ’69, ’70, ’73, ’74, ’77, ’78, ’81, ’84, ’87, ’90, ’94, 2000, 2001, 2002, 2008, 2011 and 2015 are separated from 42 bull market years. [Editor’s note: Ned Davis definitions of bull and bear market are used in the Almanac. A cyclical bull market requires a 30% rise in the DJIA after 50 calendar days or a 13% rise after 155 calendar days. Reversals of 30% in the Value Line Geometric Index since 1965 also qualify. A cyclical bear market requires a 30% drop in the DJIA after 50 calendar days or a 13% decline after 145 calendar days. Reversals in the Value Line Geometric Index also qualify. Bull and bear markets are measured at peak and trough dates, so both the time and price criteria must be met as of the peak and trough dates. Using this criterion, the majority of 2015 was a bear market.] 

 

While Tuesday and Thursday did not vary much between bull and bear years, Mondays and Fridays were sharply affected. There was a swing of 10.1 percentage points in Monday’s and 9.5 in Friday’s performance. When traders and investors are reluctant to hold positions over the weekend and fail to buy on the first trading day of the week, they are showing a lack of confidence. Since mid-March, Fridays (or the last trading day of week) have been poor, and Mondays (or first trading day of the week) have been weak. Improving market performance on Fridays and Mondays would confirm this bull still has legs while the opposite would suggest a rising probability of trouble ahead.

 

 

 

As of the today’s close, both the faster moving MACD “Buy” and slower moving MACD “Sell” indicators (at bottom of following charts where blue arrows point) applied to DJIA and S&P 500 were negative, but still trending toward reversing the sell signal that has been on the charts since early March. DJIA’s MACD Buy indicator would turn positive with a one-day gain exceeding 115.27 points (0.56%) and S&P 500 MACD Buy would be positive with a 16.00 point or greater gain (0.68%).

 

 

Continue to hold long positions associated with DJIA’s and S&P 500’s “Best Six Months.” We will issue our Seasonal MACD Sell signal when corresponding MACD Sell indicators applied to DJIA and S&P 500 both crossover and issue a new sell.

 

 

Our old esoteric chart pattern friend, the Three Peaks and a Domed House Top pattern (3PDH), is potentially in play again. Below is our latest plotting of this arcane yet uncannily accurate chart pattern as it currently may be playing out on the S&P 500. But first a brief profile on the 3PDH.

 

The Three Peaks and a Domed House pattern was developed back in 1968 by the late, great technician George Lindsay, really a technical analysis savant genius. Lindsay’s research found that the market followed this pattern “at least 60% of the time” and that “the majority of all major advances ended in a pattern which resembled the Three Peaks and a Domed House.” This recurring market pattern occurs at nearly every major U.S. equity market top and articulates consistent market behavior. 

 

The 3PDH chart pattern demonstrates how markets tend to come off a low and move up until a resistance point is reached (point 3). Then after two attempts to move higher (points 5 and 7) there is a sell-off to point 10. This is the “Separating Decline” that separates the Three Peaks from the Domed House. Point 10 is always lower than either point 4 or 6, often both. If is not lower it does not qualify and the pattern is nullified. The Domed House starts with a base between points 10 and 14. A rally usually ensues and forms another higher base (points 15 to 20, Roof of the First Story). Then from there the final surge to the high creates the Dome from points 21 to 25. The drop-off returns to the vicinity of point 10.

 

 

Minor and major formations of Three Peaks and a Domed House often overlapped with a Peak of one being a Dome of another. Sometimes Three Peaks followed a Domed House. Some tops could not be fit into the pattern and do not qualify. In some instances points 25 or 27 were higher than the point 23 Domed House Top. 

 

Our most recent successful use of the pattern began in October 2014 with timely and prudent follow up in July 2015 that came to completion in the summer of 2015 with the global financial crises fueled market carnage in August and September of that year. We began tracking the current count in August 2016. This is a recount of that with point 3 being moved back to the late December 2014 high, points 4-15 remaining the same and a recount from there on out. 

 

 

Correlating the current chart of the S&P 500 with the Basic Model above, the recent high on March 1 could be point 21 or even point 23. In either case a bounce slightly higher to a point 23 Domed House Top or even at point 25 or 27 seems likely given the historical seasonal prowess of the month of April and the propensity for markets to lose steam in May as well as the current technical setup for an oversold bounce.

 

We have added a few key major support levels or levels any major correction or bear market could bring the S&P back to at: the November 2016 Election Low ~2085, the Brexit Low ~2000, the Point 10 Low ~1865 and big round 1800 below them all. We do not expect the 20%+ bear this year – though that could change if things deteriorate. 

 

It is more likely in our view that after a bounce higher over the next month or so into the 2400-2450 range in early-mid May. Then we could drop 8-15% into the area between the Election Low and the August/November highs, finishing 2017 around 2425, up around 8% for the year (as forecasted) and be in a longer bear that does not finish until midterm 2018 peak to trough.