By Chris Ebert

It does not usually take a trader very long to hear sayings about the stock market. Some even seem plausible. Perhaps one of the best known phrases is sell in May and go away. It’s a nice catchy rhyme, and it does have its merits, since summertime often brings on doldrums in which stock prices languish in a sideways choppy move.

But what about the years that stocks skyrocket after May? Selling stocks and going away just because of an old cliche isn’t always the best choice.

The Options Market Stages can be of some help for traders looking to determine whether or not this particular May is a good time to sell and go away.

oms 5-12-17

There are just a few simple questions a trader needs to ask:

  1. Is this a Bull market
  2. Is there irrational euphoria
  3. Have stocks hit a brick wall of resistance

BLUE DIGESTING GAINS ZONE
On the chart, anything above the bearish red zone can normally be considered bullish, so the current market in May 2017 appears to be clearly bullish. Digestion tends to end with an explosive rally in stock prices, so long as no major negative news catalyst comes along to squash it. This year the S&P remains in the blue zone, one of digestion in which traders who have seen gains in recent months take their profits, and those on the sidelines scoop up the shares of stock in hopes that the rally will resume. That’s not necessarily a great argument for selling in May, because a rally is still a distinct possibility. There is no guarantee the rally will resume; but at the present time there is no statistical reason to doubt that it will. The S&P has not yet hit a brick wall of resistance.

YELLOW RESISTANCE ZONE
When the S&P 500 sinks into the yellow zone it often correlates with the S&P hitting a brick wall of resistance. If the S&P was to hit a brick wall that would be a good argument to sell in May and go away. Even so, going away could mean missing out on the next leg up should the S&P break-out above resistance.

GREEN LOTTERY FEVER ZONE
If the S&P somehow manages to enter the green Lottery Fever zone, the argument to sell in May would become even weaker, because it usually coincides with irrational euphoria that sends stock prices much higher, sometimes without regard for poor economic news.

A full description of each zone in the Options Market Stages can be accessed HERE ==> Stage Descriptions

The preceding is a post by Christopher Ebert, co-author of the popular option trading book “Show Me Your Options!” Chris uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. Questions about constructing a specific option trade, or option trading in general, may be entered in the comment section below, or emailed to OptionScientist@zentrader.ca

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