- Dugald Malcolm

Montreal, Quebec

At the end of April, we were looking at a trendless market moving nowhere but sideways. What a difference a month makes, as much has changed since I last posted an update on April 30th. I had ended that blog with a suggestion that should the market break below the bottom boundary of the sideways pattern, that the old adage "sell in May and go away" might be the best thing to do. Unfortunately, that negative scenario did play out giving us the worst performing month since February of 2009, with the S&P 500 closing down by -8.20%.

The second trading day of May 4th brought a close below the lower boundary of 1,180 that I had been keeping an eye. The breach was made with above average volume, a trend witnessed accompanying sell-off days in the previous month of April. Then, two days later on the 6th of May, the so called flash crash occurred. While some of the talking heads had theorized that this was merely the result of a fat fingered trade, the technical damage had been done.

While it appeared that the market was making a comeback in the days following the flash crash, true market confidence could not be restored without retesting the lower limits made on May 6th. Sure enough, the market did return to test the intraday low of 1,065.79 made that day. While some were hoping to find support with value buyers once again returning to the scene as they had done on May 6th, the ugly truth began to reveal itself as the S&P 500 put in new intraday lows of 1,055.90 and 1,040.78 on the 21st and 25th of May respectively. Then, last Friday, the closing bell was a death knell as the market finally closed at 1,064.88, 0.91 points below the flash crash intraday low.

In examining the chart we see a troubling story for the S&P 500 as it is up against many significant obstacles. First, it sits nearly 40 points below the 200 day moving average. The moving average was a boundary not broken below since July of last year - and, even then, only briefly. Today marks the 12th consecutive day of trading below the 200 day moving average with two failed attempts made to break back up above it.

Second, technical indicators show negative momentum as being strong and not likely to turn around any time soon. The ADX line is now 41.75 with the -DI at 37.11. Typically, anything over 20 on the ADX line suggests that a trend is in place. The DI lines then indicate which way the trend is, either up (+DI) or down (-DI). The current indicator lines are telling us that the trend is extremely strong and extremely negative. This evidence is corroborated by the observed above average market volume accompanying the down days. Any positive days are done on relatively less trading volume.

Finally, some technical analysts are forecasting a possible Head-and-Shoulder Top Formation. As I illustrated on the above chart, the possible Left Shoulder was formed at the beginning of the year with the subsequent surge higher and recent collapse forming a potential Head Formation. This would put the neckline in at our current level of support at the 1,040 level. Although there is no certainty that this pattern will play out, it is, nevertheless, a good idea to keep a close eye on support levels just in case it does.