Chart Talk {06.05.19}

I'm posting a chart today on what I believe is a higher probability scenario of where I think we might be headed in the coming months.  I am basing this scenario largely on past experience and my theory of seasonality.  Under that theory I've noted in the past that the late summer months into the fall are the often the most dangerous period for stocks.  That's not all that much different than other studies on market seasonality that have been done which shows that the six month period beginning around May 1st is a period of weakness for stocks.  But what I've noted in the past is that stocks often suffer a drawdown in the first part of my cycle but then in the early part of the summer have a snap back rally.  That rally in this typical pattern meets resistance somewhere around highs set earlier in the year and often stalls out somewhere in mid-July.  Then after a few weeks of back and forth action markets begin a decline that often tends to worsen into the fall.  Stocks tend to find their equilibrium sometime in mid-September to early October which often sets us up for a nice end of the year rally.  If that pattern would hold this year then you could see the following sequence unfold which I've tried to lay out in the chart above.  The points I want to make are numbered and I'll explain what those numbers mean below.

1.  Old highs on the S&P 500.  What this chart doesn't show is that the green line running through the April high {which I've circled} is now structurally significant as it is also a double top high.  That is it is also near the highs we first reached in January 2018.  That means this now represents a significant area of resistance for stocks. A major break out from this area would be considered significant and probabilities would then suggest higher prices in the future.  Likewise a market that once again gets close to this resistance but then pulls back would at a minimum suggest a higher probability of more indecision in stocks or a pullback.

2.  A level of support that probability suggests stocks could find support if we see another down leg in prices at some point.

3.  Approximate line of advance probability suggests we could see over the next month to six weeks if my theory of seasonality is working this year.

4.  Approximate price area probability suggests where we might see any rally stall out during this period.  Please note that this is just a guess and based on past patterns.  We could trade higher or lower than where I've indicated on this chart.

5.  Shaded area in yellow represents the range we could expect to see from a market decline assuming my theory and the pattern holds into summer.  Again this is just a guess.  Markets could trend higher or lower than what I've indicated.

There you have it.  Please note that this is just one scenario that could take place.  There are many others out there.  I'm not saying this is going to happen and I'm certainly not saying you should trade off this pattern if you're not a client of mine since I don't know anything about your investment focus or particular risk reward patterns.  I'm putting this out so that clients and friends of my firm understand how this conforms to my seasonality theories.  Anybody else who trades on this is on their own.

Chart is from Tradingview.com although the annotations are mine.

Back Friday.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time   We reserve the right to change any of these investments without notice on this blog or via any other form of verbal, written or electronic communication.