In mid-April I re-printed a long section of the Profit Radar Report and asked if ‘sell in May and go away arrived early.’
How has the pattern and connected trade played out?
Is the 2013 edition of ‘Sell in May’ a no show or is it just delayed?
Below is an updated version of the chart featured in the April 17, “Did ‘Sell in May and Go Away’ Arrive Early” article.
Two things stand out:
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The sell in May pattern is obvious.
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The sell in May pattern is perhaps too obvious to come true.
Because the pattern was so obvious, the Profit Radar Report imposed certain conditions to authenticate the pattern:
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The S&P 500 has to move above und subsequently below 1,593 to trigger a sell signal (sell signal triggered on April 11 – see red circle of chart insert).
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The sell in May high tends to appear as a double top. Therefore short positions were closed at 1,540 and 1,560.
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The move above 1,597 voided the sell in May pattern.
Overall seasonality (seasonality based on each year since 1950) shows weakness right around May 1. Post election year seasonality (seasonality based on each post election year since 1950) points to weakness at the end of May.
The last post election year – 2009 – saw a high in early June followed by a brief correction and continuation of the rally.
2013 may also see a high according to the post election year seasonality cycle.
Wednesday’s across the board reversal and the associated reversal candles for all major indexes suggest that the top tick has already been seen.
Overheated sentiment gauges point to a correction that will be deeper than the 2009 hiccup.
To summarize, based on sentiment and seasonality the conditions are ripe for a correction. However, we need to see a technical breakdown below support or a move to re-test resistance before getting a low-risk entry to go short. According to technicals, the odds for any top to be a major market top are low.
Yesterday’s Weekly ETF SPY highlights the precise support/resistance levels used to identify low-risk entries for the Nasdaq-100.
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