Warning: Stocks Could Be Headed For a Correction

Traders are often advised to “sell in May and go away.”

[ad#Google Adsense 336×280-IA]There’s a reason for that. Stocks tend to perform poorly between May and October.

In fact, the average return for those six months is slightly negative.

But this year, traders may not want to wait until May to go away.

If stocks keep following last year’s script, it’s a good idea to get out before the rest of the crowd…

Take a look at the remarkable similarity between how the S&P 500 traded last year and how it’s trading today…

In each year…

• Stocks went straight up from January 1 to the final week of February.

• There was a sudden and sharp pullback at the end of February/beginning of March (A).

• Investors bought into that pullback and the index quickly broke out above its upper Bollinger Band (B). And despite that overbought condition, stocks continued to chop higher for another couple weeks.

• The MACD momentum indicator showed negative divergence (C).

• The 14-day relative strength index (RSI) also moved into overbought territory (above 70) early on (D).

Finally, notice what happened at the end of the first quarter of 2012. Stocks dropped immediately and entered a correction that lasted 10 weeks and nearly wiped out all the gains for the year.

The S&P 500 is up almost 10% already this year and on the verge of making a new all-time high. But with all the warning signs we’ve looked at previously – and with all the similarities to last year – traders may not want to wait until May to go away. Now looks like as good a time as any.

Best regards and good trading,

Jeff Clark


Source: The Growth Stock Wire