The market closed mixed yesterday, however, Wednesday’s sell-off has taken an enormous toll by erasing not only the gains of Tuesday but yesterday’s intraday low was the lowest since April 19. The near-term future that is forming is all too familiar to those who study seasonal chart patterns.

We’ve studied this chart many times in the past several weeks.  But in order to illustrate an important pending technical signal, I’ve removed the upper descending dashed red line of the much-noted bull flag in order to reveal two other lines—the green 20-day moving average and the blue 50-day moving average. Two potentially important signals could place us on the short-term bearish side:  First the main support line at 1,302 is dangerously close to being violated — yesterday’s intraday low was at 1,305.  And second, and of more significance, the 20-day moving average (green line) at 1,333 is within a hair of penetrating the 50-day moving average (blue line) at 1,331—which would render a short-term sell signal, especially if accompanied by another technical negative (like a close under the support zone).

Here we see last year’s dramatic sell signal of May 17 followed by a confirming signal on July 2.  Those signals were not reversed until September 21 followed by a confirming buy  signal on October 21.  We are very close to repeating the signal of May 17 that would be triggered by a close below the support zone and the crossing of the 20-day through the 50-day moving averages on high volume.  If that was to occur, the summer would likely be spent chasing volatile swings in the indices similar to last year with the major support at the 200-day moving average now at 1,250.

This chart is one that I like to review with you several times a year.  It is simple but straight-forward—many times providing accurate bull and bear market signals.  It illustrates the importance of monthly prices (black line) remaining above the 12-month moving average (red line).  Despite the current possibility that stocks could break into short and intermediate downtrends, this chart shows the unlikelihood that a summer plunge will result in a new major downtrend.

But, like last year’s meander around the 12-month moving average, this summer could provide some heated moments and the need for seeking shelter until the uptrend resumes.

Read Today’s Trade of the Day – Why Transocean Stock is Sliding and Perfect to Short Sell.