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S&P500 – the May phenomenon

In the current era of big data and artificial intelligence, it's nice to know that some of the less complicated ideas and approaches to trading continue to work. In late April we wrote an article on the S&P 500 “Headwinds Increasing” in which a mix of technical and fundamental reasons were highlighted including the “sell in May and go away” phenomenon. Overall, it suggested a more cautious view of the U.S. equity market was warranted.

On May 2nd just one day after the S&P 500 traded to its all-time high of 2961.25, a follow-up article titled “S&P 500 buffeted” was published that highlighted the downside risks for U.S. stocks. Supporting our fundamental argument was the emergence of a “rather ugly bearish engulfing candle on the daily chart, the type often viewed before meaningful turns”.

To cement the idea that a medium-term top was in the making, the following criteria were highlighted, “a break and close below near-term support 2910, followed by a break and close below interim support 2865/55 support. Should this occur, it would project a move back to the 200-day moving average at 2770.”  https://www.cityindex.com.au/market-analysis/sp-500-buffeted/.

So here we are on the final day of May. The S&P 500 is on track to record its first monthly loss in 2019, and the “sell in May” phenomena appears to have worked again. Further reinforced this morning by President Trump's announcement of tariffs on imports from Mexico unless Mexico halts “illegal migrants”. 

Currently, in after-hours trading, the S&P 500 is trading right on the 2770 level, significant due to it being in the area of support provided by the closely watched 200-day moving average. Should this level break in coming sessions the next band of support is the 2730/00 region that includes wave equality (where wave a = wave c), the March 2726.50 low and the 38.2% Fibonacci retracement at 2714.

Should evidence of a base form in the 2730/00 area, it would be the catalyst for traders to consider covering all shorts and look to establish a small core long position with a view to adding on a close above 2800/20 (confirmation the correction is complete and that the uptrend has returned).

Conversely, should the S&P 500 close and accelerate below the 2730/00 support region, it would suggest a deeper pullback is underway towards the 50% fibo at 2640.

S&P500 - the May phenomenon

Source Tradingview. The figures stated are as of the 31th of May 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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