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'Sell In May' Will Determine The Fate Of The Bear Market Rally In S&P 500

May 04, 2020 8:14 AM ETSPY, VXX, SP5001 Comment


  • S&P 500 erased 4%+ intra-week gains to close negative as selling intensified heading into May.
  • Bearish shooting star candlestick pattern in SPX points to more near-term downside with 50-day moving average most likely to be retested.
  • CBOE Volatility Index (VIX) bounced off 20-week moving average just above 30 and looks set to resume higher.
  • A close below 50-day moving average in SPX would decisively end the 30%+ massive bear market rally.

Following a devastating Q1, U.S. stock markets came back to life in April, as S&P 500 (SP500) overcame record drops in major economic indicators such as consumer spending, services ISM, etc. to post the best monthly gain (+12%) since 1987. Though if we dissect further, bulk of the explosive gains were made during the first 10 trading days of the month, with S&P 500 largely unchanged over the past 2 weeks after higher highs were rejected ahead of the 50-week moving average:

Shooting Star Candlestick Pattern in S&P 500 Weekly Chart

Source: Investing.com

In the process, an ominous "shooting star" reversal candlestick pattern was formed last week after a 2-day decline wiped out more than 4% of intra-week gains. Such technical pattern warrants our attention, as we noticed that similar "shooting stars" had marked the end of previous bear market rallies between 2001-2002:

Shooting Star Candlestick Patterns During 2001-2002 Bear Market

Source: Investing.com

To remove the subjectivity that tends to come with technical analysis, we will use a mathematical approach and attempt to quantify the significance of such candlestick pattern. Specifically, below we identify all similar occurrences in the SPX over the past 100 years based on the following criteria:

  • SPX advanced at least 1% higher intra-week from last week's close
  • but closed negative on the week near the lows
  • SPX was in the midst of a rally over the past 4 weeks
  • while trading under its 50-week moving average

Weekly Shooting Star Candlestick During A Bear Market Rally Since 1930

Date SPX This Week's High - Last Week's Close This Week's Close - Low 1-Week Chg 4-Week Chg vs. 50-Week MA SPX Forward Chg 2-Week 4-Week 12-Week
1930-07-28 21.11 1.49% -0.14% -1.81% 4.25% -12.51% -1.94% 1.23% -15.96%
1931-03-09 17.32 2.54% 0.00% 0.00% 0.81% -11.78% -0.64% -4.97%

This article was written by

Quantitative Strategies utilizing Empirical Analysis, Pattern Recognition and Statistical Arbitrage techniques. Identifies high-probability long/short opportunities with short-medium term horizon in large caps, ETFs, commodities and FX. Macro Commentary and Market Research.

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Comments (1)

AAA Investments - PayONLY4Performance profile picture
High-quality historical data...

Thank You!
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