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A Rare Sell Signal Confirmed In S&P500

One of my favorite scans for a trade in the stock market is looking for setups with a tight Bollinger band squeeze with divergence (just ask our member Donald) but this end of month was different.  I was looking for confirmation of something more....ominous.

In case you missed it, the S&P500 exhibited a rare (and solid) piercing of the upper monthly Bollinger band in May which was met with immediate selling pressure.  To many technicians, merely piercing the upper band raises a warning flag as quite often it indicates the market will revert to the mean, or at a minimum the nearest support. 

The Bollinger band mantra goes something like this:

  • Buy when the price falls below the lower Bollinger band
  • Sell when the price pierces outside the upper Bollinger band

and boy......did they sell! 

I call it "rare" because normally price is contained within the Bollinger band and actually piercing the upper band with such severity only occurs every 5-10 years or more.  Of course a naysayer will call this voodoo and the typical news television host or commentator entertainer will sit behind their camera doing what they do best; smile and reassure the viewer that all is well, the Fed's got our back, the economy is improving and buy the dip.  That's their job after all.  They have sponsors and advertisers to satisfy.  They need to keep you engaged and coming back for ratings sake however historically these "cheerleaders" are dead wrong most of the time when it comes down to a monthly BB being pierced.  There IS definite reason for concern.

Rather than ponder the many "whys" of the market selling, I will merely present these historical charts highlighting periods where the monthly BB was pierced solidly and you can judge for yourself if price reverted or not. (click on any chart to enlarge)  In my book, the fact that June couldn't even take out the high is confirmation that no dear trader, odds are we're not heading higher just yet.  Whether we find support at the 10month, 20month or even lower is up for discussion, but confirmation is now there with June behind us.  Lower we will go.

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Comments

  • Admin

    fwiw the following ETFs issued the same signal: IYT, IBB, XLV, XLY, XLP, XLI

This reply was deleted.

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