Editor’s note: This article was originally published on August 10, 2019 via jeffclarktrader.com.
Yesterday, something stuck out to me on the chart of the S&P 500. Something we haven’t seen happen for a few months…
A specific, dead-simple pattern that can foretell big moves in the stock market.
Jeff’s talked about this pattern in the past. He calls it “The Kiss of Death.”
If you watch it closely, you’ll be able to spot important inflection points in a stock or index. Today, I’ll show you how to use it… and what it’s telling us about the market right now.
There are two key components to the Kiss of Death pattern.
One is the 50-day moving average. Longtime readers know the 50-day MA acts like a momentum gauge. When stocks are trading above the 50-day MA, that’s bullish. When they trade below it, that’s bearish. That’s because the 50-day MA tends to act as a strong support/resistance level for stock prices.
So, for this pattern, the first thing that must happen is the price of stocks falling below the 50-day MA. Whenever that happens, the momentum shifts from positive to negative.
But what comes next is even more important.
Take a look at this chart of the S&P 500…
The blue circles on the chart show points where the S&P has fallen through the 50-day MA, come back up to “kiss” it, and fallen again.
These second falls are often dramatic. You can see it from November to December 2018. Stocks came up to the declining 50-day MA resistance level twice, “kissed” the line, and got smacked down again.
It happened in May, too. After touching the 50-day MA resistance line in mid-May, stocks fell about twice as hard as the initial decline.
Now, let’s zoom in on what’s happening today…
On Friday, the S&P 500 closed lower from the 50-day MA at about 2935. It failed to break the resistance…
Normally, I would see this as definitively bearish. But, as Jeff pointed in his blog Delta Direct yesterday morning (paid-up subscribers can read here), there’s a good reason to stay bullish in the short term…
Individual investor sentiment levels, as measured by the AAII Sentiment Survey, are overly bearish right now. Individual investors are typically seen as the “dumb money” compared to institutional investors – the “smart money.” So, this works as a contrary indicator.
At 48%, the number of bearish respondents on the August 8 survey is the highest since it hit 40% on May 30 – which, of course, is right when the market began its rapid recovery from that month’s selloff.
Because of this, I think stocks will push higher on Monday and close above the 50-day MA. But, if they don’t, consider making a bearish bet on the market. As the “Kiss of Death” has told us many times before, that’s a good signal there’s a big fall ahead.
Regards,
Mike Merson
Managing Editor, Market Minute
P.S. This pattern is just one small part of the trader’s essential toolkit. To do well in a volatile market environment, you have to learn more.
And as any regular readers know, Jeff thinks we’re headed for something ugly – and soon…
Most investors will be caught off guard. But traders will thrive… Especially Jeff’s readers, with access to his full pattern list and regular low-risk/high-reward option trades.
It’s been a great, long bull market. But each day, it’s clear the environment is shifting. You want to be prepared when that happens. Hear Jeff’s prediction – and how to take advantage of it – right here.
