Profit Taking in May

The first chart is a NYSE Oscillator (NYMO) daily one-year chart (red line and right scale) with NYMO's 50-day MA (blue line) and daily SPX (green line and left scale). On Fri, SPX closed above 1,325, while the daily NYMO rose above 30, and the NYMO 50-day MA closed at roughly negative nine. The daily indicators above and below the price chart show NYMO is short-term severely overbought, which indicate little SPX upside and a SPX pullback.

The second chart is an eight-year daily chart of the NYMO 20-day MA (gray line) and NYMO 50-day MA (red line), which includes all historical data. The chart shows each time the NYMO 50-day MA rose to or above 20, it fell to negative 20 or lower, and each time that took place, the NYMO 20-day MA rose to or above 30 and fell to or below negative 30. Currently, the NYMO 20-day MA is roughly negative 17, which also indicates an SPX pullback.

The third chart is an SPX weekly two-year chart. SPX generally traded in the upper weekly Bollinger Bands, since it began the rally in Oct, and closed slightly above the upper Bollinger Band Fri. The ADX line, above the price chart, remains bullish, since the green line is above the red line. However, the low red line suggests profit taking may take place soon. The MACD lines, below the price chart, had a bearish crossover last month and then reversed with a bullish crossover.

Also, the red zigzag lines of the third chart show SPX ralled from roughly 1,075 to 1,225 in Aug '04 to Mar '05, in seven months, and then fell over 75 points in six weeks. Over the recent rally, SPX rose from roughly 1,175 to 1,325 over the past seven months, since Oct. So, a pullback may take place over the next few weeks.

The three charts indicate little SPX upside and an SPX pullback within the next few weeks. However, if a short-squeeze takes place, it would need to happen next week, because of recent momentum. A short-squeeze may lead SPX to around 1,350 within a week. However, it's more likely SPX resistance around 1,325 will hold and a pullback will begin next week. There are many major support levels between 1,275 and 1,315 with a key support zone between 1,275 and 1,290.

The FOMC is expected to tighten and change its statement Wed. The statement may clarify that future monetary policy is unclear, i.e. the FOMC will either pause or not pause, while remaining data dependent. Consequently, this statement will disappoint the stock market.

Charts available at http://www.peaktrader.com Forum Index Market Forecast section.

Arthur Albert Eckart is the founder and owner of PeakTrader. Arthur has worked for commercial banks, e.g. Wells Fargo, Banc One, and First Commerce Technologies, during the 1980s and 1990s. He has also worked for Janus Funds from 1999-00. Arthur Eckart has a BA & MA in Economics from the University of Colorado. He has worked on options portfolio optimization since 1998.

Mr Eckart has developed a comprehensive trading methodology using economics, portfolio optimization, and technical analysis to maximize return and minimize risk at the same time and over time. This methodology has resulted in excellent returns with low risk over the past four years.

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