This Market Shape Is More Telling than a “Death Cross”

The major U.S. indices open today right about where they started the month of August.

The Dow has lost -0.85%.

The S&P 500 is down just -0.09%.

The Nasdaq gave back -0.84%.

If you are a straight “buy and hold” equity investor, you probably haven’t made too much money this month. But if you’re an options trader, you could be taking profits all along the way, like we have!

So what’s the rest of the month have in store for us?

If you love technical analysis as much as I do, it probably has not escaped you that the Dow Jones Industrial Average shows what is known as a “death cross.” (Click here for a closer look at that.)

That’s a trading term for when the 50-day Simple Moving Average (SMA) crosses below the 200-day SMA, as it did last week, on August 10.

A death cross gives an indication of some weakness in the average.

However, its meaning isn’t as clear cut as you might think. Will it mean lower prices? Or will it simply be a short-term cross that will rectify itself as prices go higher, eventually bringing the 50-day SMA back above the 200-day SMA? Only time will tell.

I’m looking at this shape instead…

The “Cross” and the “Triangle”

First, here’s a clear look at the Dow’s “death cross,” courtesy of Investorplace.

INDU_Chart_PAINT_SMALLBut I want to note that the SPDR S&P 500 ETF (NYSEArca:SPY), which tracks the S&P 500 index, is showing an interesting pattern…

The SPY is favoring the 200-day SMA as an area of support.

Each time it has tested this SMA recently, the ETF has bounced higher, as you can see in the chart below.

SPY_Stock_PAINT_SMALLThe recent highs on SPY are getting lower, and the lows are getting higher, forming what traders call a “symmetrical triangle.” The price usually comes to a point and breaks out one way or another, to the upside or downside. Usually, the price breaks to whichever line is longer, meaning if the ascending support line is longer – like in the chart above – it should break out to the upside.

Two things key me into looking for the markets to go a bit higher, at least in the short-term, meaning the rest of this month and next:

  1. Volatility shakes the “weak money” out of the markets, giving us the opportunity for more profits. This was well-stated in a recent article by Money Map Chief Investment Strategist Keith Fitz-Gerald, a colleague and good friend of mine, and I encourage you to read that here; and
  2. The color coding on Money Calendar still shows significant bullish sentiment through the end of the month.

Money_Calendar_calendar20150818_PAINT_SMALLLooks to me like a lot of opportunity.

Talk to you soon.

Tom Gentile

8 Responses to “This Market Shape Is More Telling than a “Death Cross””

  1. Good article Tom. I agree with your ta on the ascending support line, however, how are we to reconcile a potential breakout to the upside when the complacency level is still hovering near 100%?

  2. Tom I’m concerned that the market calendar’s look back is hard to trust given the eminent Fed action over the next month or so. The volatility is unprecedented and has challenged many of ourndcurrent positions to double.

  3. Tom I’m concerned that the money calendar suggested buys are being thrown off with the markets jitters about an eminent Fed rate hike soon. Our current positions in SPY and FFIV haven’t gone anywhere and am doubtful they’ll double or even make us money. Don’t mean to be negative but we’re in unprecedented market conditions.

  4. Hi All, thanks for the comments. I think when you weigh everything, also looking back over the last 10 years, August is typically a dead month. End of Summer, not much happening in NY or DC for that matter, and yes, though I agree with Bobs comments on the fed, remember that most of the time these meetings are already baked into the numbers. We know interest rates are going up, its not a question of if, its when. China has already started the process by devaluing its currency, and September seems to be the month that eyes are on.

    Remember, this is a short term jump I am looking for technically. All the planets are lining up, but even then theres no guarantees. Best thing we can do is to create the best possible position with the least amount of risk if we are wrong. My mentor always asked the first question… What if I am Wrong.

    Thanks again…

  5. September 17th (Yellen) is a “NON-EVENT” ( like a Broken record player.) The REAL Issue begins in Mid-October when the IMF allows the Chinese Yuan [Reserve Currency Status] The BIG GUYS are already taking their Positions. And you thought that 1987 and 2008 were BAD !

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