Last Friday the market closed below its 50-day moving average. Theoretically, such a close should have sent traders scrambling for cover Monday morning. As I noted in this past weekend’s missive:

“While the long-term picture still clearly suggests a high level of risk aversion, short-term dynamics have improved which led to a small increase in equity exposure several weeks ago. As shown below, the market has continued to defend the 50-day moving average of the last week while in a corrective process, until Friday.”

“While the market did violate the 50-dma on Friday, the market held support at recent bottoms. Critically, there is a“head and shoulders” process being formed and the 2040 level is the neckline support of that pattern. A break of that neckline will lead to a more substantial correction process.”

“With the 50-dma trending positively above the 200-dma, we do want to give the markets the benefit of the doubt currently, but I am not dismissing my sense of caution.”

Yesterday, support at 2040 was defended as the markets turned sharply higher amidst continued poor economic data releases. For now the bull’s clearly remain in charge, but the question is for how long?

As we head into the summer months, I am becoming more concerned about a correction against the backdrop of historical tendencies, continued poor economic and fundamental data, a presidential election year, and continued weak technical structures. Let’s take a look at each of these points.

Historical Tendencies

I have written in the past about the historical precedent of “Sell In May & Go Away.” Every year, there is always a litany of articles written about why it is such a bad idea, you need to just “buy and hold”, blah…blah…blah.

Yes, there are years where the markets rise during the summer months, but more importantly, it is those years that don’t which cause the most damage. Last year, selling in May, as I recommended, saved investors during the August dive.

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