Short-term Bearish Seasonal Winds Blowing In.

Bullish seasonal tendencies (end/beginning of the month) ended today as the market officially moves into the “sell in May and go away” period. The next two trading days are historically quite bearish as the S&P has only finished higher 23.8% and 19.0%, respectively.

seasonality alone is (in almost every case) not a reason to place a trade. However, when compared  with the current state of the market at the time the seasonal tendency arrives, the probability of a successful trade can be increased tremendously. Always be aware of the market’s seasonal picture.

With three out of the four major benchmarks in an “oversold” to “very oversold” condition the probability of a sustained move higher is low.

The market-moving unemployment report is due out before the bell tomorrow. If the market gaps higher at the opening I will be tempted to place a short-term trade. With the benchmarks already in an overbought state and the bearish seasonal winds blowing in for the next few days it will certainly be hard to resist.

Over the past year this type of action (gap open) has occurred roughly 50% of the time. When it does occur the return a week later is approximately -1.2%.  

Overbought/Oversold levels for May 3, 2007

• SPY -  76.0 (overbought)
• DIA - 85.7 (very overbought)
• IWM - 56.4 (neutral)
• QQQQ - 73.1 (overbought)
• GLD -  54.5 (neutral)
• OIH - 74.7 (overbought)

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