We came into last week expecting stocks to trend higher. After all, the last several trading days of November are typically quite bullish. Over the past 40 years, the S&P has rallied 28 times during the last week of November. And, the average gain is 1%.

So, it’s no surprise the market was higher last week. Even after Friday’s modest pullback, the S&P 500 managed to gain almost 1% for the week.

But, as I mentioned last Monday, I wasn’t looking to buy stocks last week. The chart of the S&P 500 looked vulnerable. And, the Volatility Index (VIX) was on the verge of generating a sell signal.

We got that sell signal at the close of business on Wednesday when the VIX closed back inside its Bollinger Bands. The VIX continued higher on Friday, thereby confirming the sell signal. So, the market should be headed for a period of weakness.

Take a look at this chart of the S&P 500 plotted along with its various moving average lines…

All of the moving averages are spread fairly far apart – with the short-term 9- and 20-day exponential moving averages (the red and green lines) trending far above the 50-day moving average (the blue line). The market has used up a lot of energy during its recent rally phase. It now needs to either consolidate for a while and allow the 50-day MA to catch up to the 9 and 20-day EMAs… or fall, and force the red and green lines to decline down towards the blue line.

Either way, there’s not much energy available right now to fuel a strong advance from here.

The market has had a tremendous year for far, with the S&P 500 gaining about 25%. Lots of folks are looking for even more gains as we head into Christmas and into what is typically a strong bullish seasonal period.

Before that happens, though, it looks to me like we’ll get a few days of weakness. A pullback from here would be in line with often happens following a VIX sell signal. And, it would give all the moving averages a chance to come together again and build energy for another rally going into the end of the year.

Best regards and good trading,

Jeff Clark

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Reader Mailbag

Are you preparing your portfolio for a drawdown this week? Or holding out for a year-end rally?

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