Jeff Clark's Market Minute

A Simple Pattern for a Volatile Market

By Mike Merson, Managing Editor, Market Minute

Yesterday, something stuck out to me on the chart of the S&P 500. Something we haven’t seen happen for a few months…

A specific, dead-simple pattern that can foretell big moves in the stock market.

Jeff’s talked about this pattern in the past. He calls it “The Kiss of Death.”

If you watch it closely, you’ll be able to spot important inflection points in a stock or index. Today, I’ll show you how to use it… and what it’s telling us about the market right now.

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There are two key components to the Kiss of Death pattern.  

One is the 50-day moving average. Longtime readers know the 50-day MA acts like a momentum gauge. When stocks are trading above the 50-day MA, that’s bullish. When they trade below it, that’s bearish. That’s because the 50-day MA tends to act as a strong support/resistance level for stock prices.

So, for this pattern, the first thing that must happen is the price of stocks falling below the 50-day MA. Whenever that happens, the momentum shifts from positive to negative.

But what comes next is even more important.

Take a look at this chart of the S&P 500…

The blue circles on the chart show points where the S&P has fallen through the 50-day MA, come back up to “kiss” it, and fallen again.

These second falls are often dramatic. You can see it from November to December 2018. Stocks came up to the declining 50-day MA resistance level twice, “kissed” the line, and got smacked down again.

It happened in May, too. After touching the 50-day MA resistance line in mid-May, stocks fell about twice as hard as the initial decline.

Now, let’s zoom in on what’s happening today…

On Friday, the S&P 500 closed lower from the 50-day MA at about 2935. It failed to break the resistance…

Normally, I would see this as definitively bearish. But, as Jeff pointed in his blog Delta Direct yesterday morning (paid-up subscribers can read here), there’s a good reason to stay bullish in the short term…

Individual investor sentiment levels, as measured by the AAII Sentiment Survey, are overly bearish right now. Individual investors are typically seen as the “dumb money” compared to institutional investors – the “smart money.” So, this works as a contrary indicator.

At 48%, the number of bearish respondents on the August 8 survey is the highest since it hit 40% on May 30 – which, of course, is right when the market began its rapid recovery from that month’s selloff.

Because of this, I think stocks will push higher on Monday and close above the 50-day MA. But, if they don’t, consider making a bearish bet on the market. As the “Kiss of Death” has told us many times before, that’s a good signal there’s a big fall ahead.

Regards,

Mike Merson
Managing Editor, Market Minute

P.S. This pattern is just one small part of the trader’s essential toolkit. To do well in a volatile market environment, you have to learn more.

And as any regular readers know, Jeff thinks we’re headed for something ugly – and soon…

Most investors will be caught off guard. But traders will thrive… Especially Jeff’s readers, with access to his full pattern list and regular low-risk/high-reward option trades.

It’s been a great, long bull market. But each day, it’s clear the environment is shifting. You want to be prepared when that happens. Hear Jeff’s prediction – and how to take advantage of it – right here.

Reader Mailbag

Today, a subscriber gets comfortable with volatility…

Hey, Jeff. For the first time I did not panic. Yes, it was painful to watch my account drop, but I am willing to sell the rally. I got stopped out of a bunch of positions in December and lost 20%.

This time, you taught me to be careful and be a contrarian. I did buy a couple of SPY calls today but am confident that in the next week or so we will have a bounce. Thank you for your teachings. I’m a lifetime member and am looking forward to your words of wisdom for a long time.

– Kerry G.

And another imparts some wisdom for the underwater option trader…

Hey Jeff,

Just a note about a trade I made about a month ago. I bought puts on the VXX to take advantage of some volatility in the market. I bought 3 contracts of VXX. I got the volatility I expected but barely. I was way down on the trade because I was about two weeks early. I stayed with it even though I didn’t want to. When the volatility came, I ended up getting about a 75% gain on the trade after it had been down over 80%.

I sold 2 of those contracts for that gain. I held onto one which I then forgot I had it because it went down over 90%. I thought it would expire worthless is why I didn’t think of it. I checked my account today and the one VXX put I have left is up over 200%! Not bad for a worthless trade…or so I thought! So dear traders don’t panic, hold your nose and set yourself up for the coming bounce that will most likely happen soon.

Paid-up subscriber,

Mike

Thank you, as always, for the thoughtful insights.

Readers, what’s the last trade that doubled your money… or tripled it? How’d you do it?

Send in your trading stories right here, and we’ll see to sharing them in a future issue.

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Jeff’s intuitive feel for short term market swings and his strong protective discipline have allowed me to lock in thousands of dollars in gains where I might otherwise have just ridden the markets up and down .”  -Chris, a reader and “seasoned investment advisor” from Seattle

Jeff -- your picks and analysis have been nothing short of amazing. I have traded the market for many years but I must admit, I have NEVER seen something this good.” - Mike H.

In only 2 weeks of using the service I’ve booked over $10K in profits. Needless to say I’ve paid for my membership.” - Tony J.

I started following Delta Direct about 3 weeks ago… I bought a small investment from one afternoon to the next morning. About 11AM I got out and made 8K in less than 24 hours.” – D. Tilghman