Keep Your Eye on This Chart…

“Sell in May and go away” is a well-known saying on Wall Street. It highlights the calendar shift from the best six months of the year for stock prices to the worst six months. It suggests investors take some chips off the table, enjoy the summer, and come back when the leaves start to fall.

This year, though, investors might not want to wait until May – depending on what happens to this chart…

This is the chart of the S&P 500 plotted against its 20-day exponential moving average (EMA). Ever since the index rallied above its 20-day EMA at the end of October – thereby kicking off the “best six months of the year” – the line has been support on every minor pullback.

Indeed, the S&P has tested its 20-day EMA nine times during this rally. Each time, the line held as support and stocks resumed their rally.

So, this is a critical level. Up to this point, the smart move was to buy on each test of the 20-day EMA.

Now though, as the calendar starts to shift, the “smart move” starts to shift too.

When the index closes below its 20-day EMA it will likely mark the start of an intermediate-term correction phase that lasts for several weeks, at least, and knocks 10% or more off of the index. In other words, if the S&P closes below 5,180 then it’s probably headed towards 4,700 or so over the next several weeks.

Of course, the S&P hasn’t done anything wrong yet. It’s still trading above its 20-day EMA. So, the rally phase is still intact. It’s certainly possible the market can keep rallying through the end of this month, and close out its best six months on a strong note.

But, traders should pay attention to this chart. If the S&P closes below its 20-day EMA, we’re not going to want to wait until May to hit the “sell” button. We’ll be better off selling in April.

Best regards and good trading,

Jeff Clark