The S&P 500 recorded the best May gain since 2003, rallying over 50 points in the last hour to close at 5277. This impressive performance came after the index dropped to a low of $5191.68 earlier in the day, breaking the widely watched 5200 level. Traders were anticipating the release of the April PCE report on Friday, which revealed the smallest increase this year in the core inflation rate. Despite heavy selling early in the week triggering bearish commentary, the put/call ratios did not indicate a high level of bearishness ahead of the report.
Following a negative reversal on April 4th, the S&P 500 closed well below the new April pivot at 5192. The next day, the index rallied sharply and traded above and below the pivot for the next four days as the 20-day EMA started to turn lower. Four days after the reversal, the S&P 500 A/D line dropped back below its WMA, leading to a sharp six-day decline that dropped the index by 246 points from the close on April 11th to the April 19th low. The negative reversal on May 23rd also resulted in the A/D line dropping below its WMA.
Despite a higher close last Friday, the S&P 500 A/D line has not been able to move above its WMA, while the Nasdaq 100 and NYSE A/D lines have turned positive. The S&P 500 is holding above the June pivot at 5210 with the R1 at 5409. The NYSE Composite made a new rally high two weeks ago and some believe it may be forming a double top. However, recent new highs in both the NYSE Stocks Only Advance/Decline and the NYSE All Advance/Decline lines do not support this view.
Historically, weekly bearish divergences can warn traders and investors about a change in trend. This week will be crucial for monitoring the SPY Principal Shareholder Yield Index ETF, SPDR S&P 500 ETF Trust, and Invesco QQQ Trust relative to their monthly pivots, as well as watching NYSE A/D readings. Positive A/D numbers would be bullish for the stock market, while negative weekly A/D numbers would indicate that the decline from the May high is not yet over. By closely monitoring these indicators, traders can make informed decisions in the market.
