There’s a saying on Wall Street, “Sell in May and go away” which suggests bulls take some time off after the historically strong “Best Six” calendar period. No doubt that on the heels of 2011 – 2012’s massive percentage climb during that same stretch, investors might stand to do extra well heeding that advice.
Bulls may also wish to consider a bearish Fibonacci-based butterfly top in place. We’ve diligently followed the weekly pattern the last couple months and see its completion as a reason for bulls to not expect higher highs in the broader market anytime soon. On the other hand, history doesn’t always repeat itself or if it does, it doesn’t mean there aren’t opportunities for some bulls along the way.
Case in point and for fast money bulls, as well as for profitable and in-the-money bears, as we enter Wednesday’s second half, the market has set up two days of back-to-back fearful readings in the CBOE Volatility Index ($VIX), along with a decent shake-out of recent corrective lows in the SP-500 ($SPX).
Our interpretation of investors being “fearful” is based on the sentiment gauge stretching narrowly above its prior April highs and more than 20% above its 10-SMA. The false breakout of sorts above the well-watched 20% level in conjunction with a large short-term differential prone to mean-reversion, suggests investors have potentially gotten ahead of themselves relatively speaking.
At the same time, what’s viewed as a decent shake-out amounts to price in the SP-500 not only undercutting the April corrective low by about 1%, but also Wednesday’s price filleting of bulls tethered too tightly to yesterday’s hammer reversal. An additional bonus in our eyes, today’s low of 1343 tested perfectly the low of our own tracked and less obvious, 1343 – 1371 support zone, which we’ve maintained as part of our Weekly Outlook and Market Barometer columns for more than a few weeks at this point in time.
Figure 1: SP-500 ($SPX) Daily Chart
In truth or to be fair, our estimated support zone was actually slightly outdated. Its calculation was based on a correction of 3 – 5% for the SP-500 back in late March and a high of 1416; which was narrowly eclipsed with a high of 1422 to start off the month of April. Nonetheless, with a dip of 5.5% into 1343 falling into the “close enough” category worth paying attention too; bears and fast money bulls empowered by Weeklys options shouldn’t look a gift horse in the mouth, even if they still see a long and less-than-hot summer ahead. I guess you could say we think there’s opportunities to sell and sometimes even buy in May; just don't bother to go away.
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
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