Market Confirms a Sell Signal

On Thursday, negative news from Europe, mostly positive earnings news from the United States, and finally the death of a despot, propelled stocks in a series of dizzying swings. Up and down they went from down 39 points on the Dow on the opening to up 75 points by 10 a.m., then down 175 points by noon, and up 190 points by 3 p.m. But when the final bell ended trading, the major indices were mixed. On balance little had changed.

Despite the wild trading, volume was light with just 957 million shares trading on the NYSE and 539 million on the Nasdaq. And breadth was break-even with a small number of advancers over decliners on the Big Board and a few more decliners on the Nasdaq.�

Investors appeared perplexed as the media pushed for a breakout from the range-bound tedium that has gripped stocks since August. But with a VIX reading of almost 35 and up for three consecutive days, it looks like the traders will prevail for an indefinite period of time.�

 

On Wednesday, the S&P 500 reversed at 1,230, which exactly matches the high of Aug. 31. This not only enforces 1,230 as a very important resistance number but creates an ominous bearish double-top. It also tells us that the seemingly minor support line at 1,190 had better hold since the next support is at the important 50-day moving average at 1,177. To add further grief for the bulls, the stochastic issued a confirmed sell signal.

The Nasdaq�s chart is slightly weaker than the S&P 500�s. Note that it closed below the bottom of the support zone of 2,600 to 2,668. Its next major support is at the 50-day moving average at 2,518, and its stochastic also triggered a confirmed sell signal. (If you�re looking for specific ways to play the current market through options, click here.)

One widely followed strategy that has caught the attention of market timers has a record success that makes it worthy of our study. It goes by several names: �Best Six Months Switching Strategy,� �The Halloween Effect,� and �Sell in May And Go Away� are some of the catchy titles.

The method is simple: Buy the 30 stocks of the Dow Jones Industrial Average on Nov. 1 and sell them on April 30. Since 1950, there have been only nine years that the �Six Months Strategy� failed to perform. The method has been studied by academics and successfully tested in other global markets. The results show that this discipline beats buying and holding by an enormous margin.

But it is Sy Harding, from streetsmartpost.com, who applied a timing mechanism that resulted in even better numbers. Sy discovered that if the MACD indicator was on a buy signal on Oct. 16, the index should be bought. But if the MACD is on a sell signal, it is best to wait until the next buy signal is given. Further, the best time to sell is when the MACD is on a sell signal on April 20. If it is not, he waits until the indicator flashes its next sell signal before he exits stocks.

The results show that if $10,000 was invested and held for the entire 61-year period, it would have gained $578,395. But if invested using his strategy, it would have gained $1,581,000, while if invested in the six months starting in May, it would have lost $6,384. (See The Stock Trader�s Almanac results here.) On Monday we will apply the study to the current market.