Equities capped off a negative week Friday, leading short-term indicators to move lower or reverse into a column of Os.

Friday’s action capped off a negative week for US Equity indices with the S&P 500 Index (SPX) falling 2.61% (5/16 – 5/23) and reversing into a column of Os at 5800. Most US equity indices saw their charts continue to pull back from recent rally highs with the Dow Jones Industrial Average (.DJIA) being the only index to return to a sell signal. Short-term indicators like the 10-week (^TW) and weekly momentum (^MO) either continued to fall or reversed into a column of Os after last week’s trading. Among those notable reversals, was the percent positive weekly momentum for S&P 500 Index (^MOSPX) falling into a column of Os at 78% after having rallied to 84% on the chart early last week. Similar chart action transpired within the mid and small cap space as the weekly momentum indicators for the S&P 400 (^MOSPMID) and S&P 600 (^MOSPSML) also reversed into a column of Os.

For those not familiar with the weekly momentum metric, it evaluates a short-term (one-week) and intermediate-term (five-week) moving average to determine the potential for near-term price direction. When weekly momentum flips either positive or negative, it suggests that prices may have more potential for continued price appreciation or deterioration.  Generally speaking, weekly momentum tends to stay positive (or negative) for six to eight weeks. Given that the S&P 500 Index itself currently possesses five weeks of positive weekly momentum and last week capped off with a reversal into Os, could the market be poised for continued downside action?

Given the recent high marks above 80% for the weekly momentum indicators and subsequent reversals into Os, it presents an opportunity to discuss forward returns for the S&P 500 Index following such chart action. Whether looking at the ^MOSPX chart in a column of Xs or Os, trips above 80% are generally followed by muted returns in the short-term. This suggests that following such rallies the market can either trade sideways or pullback in the short-term before finding a slightly more definitive direction in the intermediate to long-term (i.e. three months forward and onward).

While an initial pullback has occurred, investors will still look for many US equities to developed support closer to current prices as many chart reside on a stem. Positions that are able to find or develop support in the coming week(s) along with sustaining buy signals could present opportunity to add exposure. Until then though, while the market may trade sideways or pullback in the near-term there are potential options strategies that can take advantage of this type of environment. Be sure to check out the feature below for more details.