- This blog has a copy of all header posts that I publish anywhere, so that those interested in seeing what my thoughts are on the markets can find them easily.
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Sunday, 29 December 2019

The First Five Trading Days Of January

The holidays are ending and volume should be coming back into markets next week as players return. New Year's Day on Wednesday is obviously a holiday as well, and the five trading days after that will be closely watched to deliver an indication of how the rest of 2020 might go. I'll be looking at that stat closely later in this post but first I'll review SPX and NDX and the position as traders return for the last two trading days of 2019. I would note again that the last trading day of the year is the only historically strongly bearish day in December, with SPX closing down 67% of the time, and Nasdaq down 15 of the last 19 years.

I have a couple of quick announcements to make as well, the first being that Stan and I are doing our end of year free public webinar looking into the year ahead an hour after the regular trading hours close tomorrow (Monday). If you'd like to attend you can register for that here. We'll also be doing our usual monthly free public Chart Chat next Sunday I think and I'll post that link on my twitter feed once I have it. Lastly we are still running our annual Xmas sale on annual subscriptions at 20% off the usual price, so at a 33.33% total discount. That's drawing to a close so if you are interested you should check that out here. On to the markets.

On SPX the daily chart on Friday closed with both the RSI 14 and RSI 5 at high levels, suggesting at least a retracement soon, and some negative divergence on NYMO, setting up a possible RSI 5 / NYMO daily sell signal if SPX retraces a bit and then retests the high to set up negative RSI divergence on both RSI 14 and RSI 5. Decent odds we see that play out over the next few days.

SPX daily chart:
On the hourly chart SPX is testing support on the short term rising wedge from the 3070 low. An RSI 5 sell signal has fixed and an RSI 14 sell signal is brewing. On a break down I'd expect this setup to deliver a retest early next week of key short term trend support at the 50 hour MA, which closed Friday at 3218. From there ideally SPX would make a marginal new all time high and then fail into a larger move down.

SPX 60min chart:
On NDX the daily chart looks similar to SPX on RSI, and I'd expect the same retrace and high retest scenario there. I'd note though that the current high is at high quality shorter and longer term rising wedge resistance, and any higher high we see on NDX may therefore be very marginal before NDX starts a move back to larger rising wedge support, currently in the 7900 area.

NDX daily chart:
On the hourly chart you can see that trendline resistance in more detail and I'd note that weak RSI 14 and RSI 5 sell signals have both already fixed. Obvious first support at the 50 hour MA, which closed Friday at 8682.

NDX 60min chart:
Nothing has changed on the bigger picture scenario, where we see a top forming here for a decline into April, and then likely retests of these highs from there.

Now if you have a horror of statistics you might want to stop reading here, and I'll wish you the very best for 2020, as I'll next be having a look at the famous traditional first five days of January as a predictor for the full year, and I'll be doing that the old fashioned way, by looking at the historical numbers.

I'm taking my numbers from my newly arrived Stock Trader's Almanac 2020, and I get a lot of the numbers I use from there, including all the historical stats for particular trading days that I refer to regularly in my posts. These are a very useful reference for traders and if you would like one then you can buy them at Amazon.

Now the stats shown for this in the Stock Trader's Almanac cover the last seventy years, including 2019, which I am happy to assume for the purposes of this analysis will close green, as it seems unlikely at the time of writing that SPX will close 2019 below the 2018 close at 2506.85. If SPX should surprise me by falling over 22.6% in the next two trading days I will need to amend my numbers slightly.

The Stock Trader's Almanac is keen on this warning system and gives it an 81.8% accuracy rate for green years from the last 44 years, with some excuses for years where special circumstances led to false signals. That's all well and good but I'm using their numbers to get a fuller view of how this stat has performed.

First I had a look at the last seventy tears in total, and I'd note first that 51 of those closed green, so 72.86% green closes is the random chance baseline against which performance needs to be measured. On that basis there were 45 green closes for the first five days of January, and of those 35 closed green, giving a performance of 77.78%, significantly better than random chance. Having said that though I felt I'd get a better view if I eliminated the three years (1970, 1984 & 1987) where the gain for the full year was less than the gain in the first five trading days of January, as counted from from that point, each of those years then closed lower, and on that basis the adjusted performance was 71.11%, performing slightly less well than random chance would suggest.

On the bear side 1950-2019 delivered 19 (or 27.14%) full year red closes, and there were 25 red closes for the first five trading days of the years in the 1950-2019 period. Of those 25 closes, eleven delivered red closes for the year, which at 44% was quite a lot better than random chance. There were no years where the red close for the year was less than the red close at the end of the first five trading days of that year.

Secondly, having noticed that this stat started with an impressive run of wins 1950-69, I stripped those out and just considered the last 50 years 1970-2019. Of these 35 years closed green (70%) and 15 closed red (30%). In terms of the first five trading days there were 33 green closes, of which 25 closed the year green, so the rate was 75.7%. I again then stripped out the three years where the full year's decline was less than the decline in the first five trading days and that accuracy rate dropped to 66.67%, again less than random chance should have delivered. Not impressive.

On the bear side there were 17 red closes for the first five trading days of the year, which translated into 6 red yearly closes. That translates into a 35.3% accuracy rate, significantly better than the 30% random expectation, but much less impressive than for the longer period including 1950-69.

Looking at the numbers I noticed that there was another impressive period for this system in 2000-9, so I looked in detail at that. For those ten years there were six green yearly closes (60%) and four red (40%). In terms of the first five trading days of those years there were five green closes, delivering four green years, so 80%, 33.33% better than the 60% for random chance, and there were five green closes delivering three red years, for a 60% accuracy rate, 50% better than the 40% for random chance. This was a banner decade for this system, and it was such an interesting decade for markets that I wondered whether this system was still famous mainly because people remember it working well then. That brings me to my last sample group, the most recent decade 2010-9.

Assuming that 2019 closes green there will have been seven green yearly closes over this period (70%) and three red closes (30%). On the first five trading days of those years eight closed green, and of those years five closed the full year green, delivering an accuracy rate of 62.5%, significantly less than the 70% that random chance would suggest. However there were only two years where the first five trading days closed red, and both of those years closed green, delivering an accuracy rate of 0%, against an expected 30% for random chance.

So what's the overall verdict here? Well in terms of green closes for the first five trading days of the years over this period, only the period 2000-9 delivered accuracy numbers that were better than random chance, which makes this January system somewhat worse than useless for predicting bullish years. The bearish year accuracy rate was generally better, but that good performance was confined to the periods 1950-69 and 2000-9. Outside those periods performance was worse than random chance would suggest, most particularly in the last ten years during which time this was entirely useless at predicting years that would close down.

Overall the positive reputation of this system seems undeserved and I'd recommend disregarding it as a predictive tool. Next week I'm planning to cover the January barometer system, which attempts to predict yearly performance from the close at the end of January. We shall see if that fares any better. Everyone have a fun New Year's Day and a great new year in 2020! :-)

Monday, 23 December 2019

Not Even A Mouse

Well the holidays are upon us, and many of those of us with lives, or even just social lives, have taken a couple of weeks off to do non-market stuff. Even the algos seem suspiciously quiet and may be taking a few days off too. I'm still here because .... well ....... it's my job, and someone has to stick around to switch off the lights and lock the doors after the last buyer has departed for the holidays. In the meantime I'm doing an update for anyone still around to read it.

Since my post a week ago SPX went higher as expected, and then went higher still. Everything is still pretty much as expected however, except that the SPX 60min sell signals failed, and the negative divergence on the daily RSI 14 was lost. As I write there are new SPX hourly RSI 14 and RSI 5 sell signals brewing, but to set up new divergence on the daily chart is likely to require a retracement and high retest to set a new daily RSI 14 sell signal brewing.

The big news on Friday however was that there was a big volume spike into Friday's high on the daily chart. These are rare and tend to signal that a significant short term high or low is being made or is close. Good to see when such a high is expected, and you can see that and the last few examples on the chart below.

Whether SPX sees much downside before some market participants return after the holiday is another question, but they should be trickling back by the end of this week, and the one unambiguously bearish day of December is the last trading day, Tuesday 31st December, and if we are to see a retracement in the first quarter of 2020 as expected, then I would usually expect to see a bearish first trading week of January to confirm that. We will see.

SPX daily chart:
In the shorter term, ES is at short term rising wedge resistance and the next obvious target within that wedge is wedge support, currently a decent match with the weekly pivot at 3210.75. A 60min sell signal fixed this morning.

ES Mar 60min chart:
NQ is also at short term rising wedge resistance and the next obvious target within that wedge is wedge support, currently in the 8680 area. A 60min sell signal fixed at lunchtime today.

NQ Mar 60min chart:
As I mentioned, there are now both RSI 14 and RSI 5 sell signals brewing on the SPX chart. The divergence is a bit hard to see on this timescale but it is definitely there and these would be high quality signals.

SPX 60min chart:
On the SPX 15min chart SPX has also hit short term rising wedge resistance and the next obvious target within that wedge would be wedge support, currently in the 3210 area. We'll see whether these targets are doable on this dull tape, but as a generally rule this setup would be a strong and immediate short setup into at least that target area and possibly as low as the SPX 50 hour MA, now in the 3190 area.

SPX 15min chart:
I'm going to be having a fairly quiet week this week but will be keeping an eye on markets when they are open. If there is anything interesting at all to report I'm planning a post at the weekend, or in any case before the end of the year.

One announcement this week is that we are running our annual end of year sale at theartofchart.net, and as well as the usual two free months for an annual membership, we are offering a further two free months on annual memberships purchased this week. Last chance until June or July next year and if you are interested then you can find that page here.

We will be doing a free public Chart Chat at the end of next week but I'll put the link to that in my next post. In the meantime, everyone have a great holiday week and if you should find yourself guiltily glancing at the market tape from time to time, know that there are market junkies even more obsessive than you keeping a close eye on the tape this week, even if there's probably not much of interest likely to happen before next week. Even I will be having a relatively light week. Everyone take care. :-)

Sunday, 15 December 2019

All Targets Great And Small

A week ago I was looking at upside targets on ES and the extended target on ES was in the 3180 target, made by the close of the week. I had other upside targets too with an extended IHS target on NQ that made target at the same time, and bull flag high retests on DAX and ESTX50 that were also made. I have run out of upside targets across the main equity indices that I watch and the December high on SPX is either in or should be close. 

In the short term there is an open 60min sell signal and an attractive trendline target currently in the 3150 area, ideally to be hit on Monday before a high retest, though there is an SPX trendline target below in the 3155 area that may hold instead, as SPX is the technical dog to the ES tail from a charting perspective.

ES Dec 60min chart:
On the SPX daily chart I mentioned that new all time highs on SPX should deliver negative RSI 14 divergence and possible RSI 14 daily sell signal are now brewing on both SPX and ES. Another high retest could deliver a similar divergence on the RSI 5.

SPX daily chart:
I was a little concerned to see that on the SPX hourly chart both RSI 14 and RSI 5 sell signals fixed on Friday. That's not inconsistent with higher highs though and those might just deliver higher quality RSI divergences, ideally into the resistance trendlines crossing next week just under 3200. A break and conversion to resistance of the 50 hour MA, which closed Friday in the 3143 area, would increase the chances that the December high is already made.

SPX 60min chart:
On the 5min chart the short term pattern is a decent quality rising wedge, with the obvious next target at wedge support, which closed Friday in the 3155 area. Ideally that gets tested Monday and holds, with another test of wedge resistance delivering the next high this week.

SPX 5min chart:
There is a lot of negative divergence here over multiple timeframes, so the December high could already be in, and this is a newsbomb rich and pre-holiday market, but so far everything is going to plan. As long as that remains the case we should be in a topping process here that might well deliver one of those memorable starts to January with big declines that we see every so often. If I've been a good boy this year, then that is at the very top of my list for Santa. We shall see :-)

Friday, 6 December 2019

Forming The SPX High

I was talking about mean reversion in my post at the weekend and that was well timed, with the first spike down on Monday. The daily RSI 5 sell signal fixed and reached target and there was the first sustained break under the SPX 50 hour MA since the cross back above that in the 2920 area. So far, so good.

Now the more impatient of our trader brethren are always looking for a first sign of weakness to be followed by a wagnerian twilight of the gods with SPX falling like a rock and blood running in the streets, but in practical terms that is pretty rare, and there's no reason to expect that here, as even if we pull more than 20% into April in a technical bear market, as I think we might well, I'd expect that to just be a technical retracement on the bigger picture before higher highs.

I've looked back through the SPX data as far as that goes back and 70%+ of all significant highs and lows on SPX are some kind of double top or bottom. The decline we saw this week on SPX is what I would describe as the low before the high, a sort of warm-up spike down before the more serious high is made, and that is generally followed by a retest and new high, which I'm expecting to see next week.

On my subscriber chart last night I drew the setup on ES as an IHS which would likely break up over 3125 last night or this morning and then either run the bull scenario into a minimum all time high retest, or fail after the break into a lower low, after which we'd likely make the same all time high retest from lower down. ES has obviously gone with the bull option on this morning's strong job numbers, and the minimum IHS target is a retest of the all time high, with a possible extension target into the 3180 area.

ES Dec daily chart:
There's a similar setup on the SPX 15min chart and the possible IHS extension target there is in the 3175 area. These targets don't have to be made, but often are. One other thing that I would note from this chart is that the move up from 3070 is within a tight rising channel, and I'd expect to see a test of that short term channel support earlyish next week:

SPX 15min chart:
On the hourly chart I'm always talking about the importance the the 50 hour MA as short term trend support and resistance. That was resistance yesterday and SPX gapped over it at the open today. That will likely now be support until the next leg down has started. We should see negative RSI divergence on the hourly chart before than next move down begins.

SPX 60min chart:
On the daily chart as soon as the current all time high is retested a full possible RSI 14 daily sell signal will start brewing as well as a weekly RSI 5 sell signal. Those divergences will likely last into the next short term high and those sell signals should fix when the next leg down gets started.

SPX daily chart:
The minimum target for this move is satisfied as soon as the current all time high at 3154.26 is retested, but SPX may well run a bit higher. I mentioned the possible IHS extension targets in the 3170-80 area. I'd be surprised to see SPX much higher than that and it may well not get that far. We'll see.

The monthly free public Chart Chat covering equity indices as well the usual wide range of other market and instruments on Sunday at 4pm EST and if you'd like to attend you can register for that at our December Free Webinars page. Everyone have a great weekend :-)

Sunday, 1 December 2019

Coming Soon - Mean Reversion

I've been talking in my last few posts about expecting a significant high at the end of November, to be followed by a downward cycle into April 2020, and here we are at the end of November, so how's that looking here? Well as it happens a rare and significant event happened at the close today that confirms the inflection point here and leans strongly towards seeing that retracement next.

Stan and I are from different schools of charting of course and are always looking for strong matches in our analyses across the many market that we cover at theartofchart.net as when we find them it strengthens the forecasts and this cross confirmation is a very nice one to see.

That event was NDX closing clearly above the monthly upper band at the end of November. This is a stat I've been watching for a few years now, and this has happened at the end of nine previous months (not within a monthly upper band ride) since the bursting of the tech bubble in 2000. One of those instances was at the major high in 2007. Another three were early in monthly upper band rides in 2007, 2013 and 2017. The remaining five signalled significant multi-month consolidation in late 2006 (consolidation) , early 2012 (over 5% retrace), late 2016 (consolidation), late 2017 (over 10% retrace), and mid 2018 (over 20% retrace). The odds here favor multi-month consolidation or retracement by two thirds, and over 50% in favor of a significant retracement, which would fit with the retracement that we have been talking about from the swing high we have been expecting here.

NDX monthly chart:

So where might that retracement go? Well on SPX there has also been an interesting development at the high this month, as a decent quality rising channel may now have been established from the 2009 low. If that channel resistance holds and SPX returns to channel support, then that is now just under 2300. I'm wondering whether this retracement might return to retest the December 2018 low at 2346, and perhaps establish a firm floor there, and then return to channel resistance, just tested of course, and rising at about 145 handles per year. That would be an ideal trading scenario here and it might be too much to hope that SPX would give us such an generous gift. Still that scenario will certainly be at the top of my Xmas list for Santa this year. :-)

SPX monthly chart:
In terms of the shorter term setup on SPX, the trendline that I was looking at in previous posts was the rising wedge resistance trendline from the December low last year and that has been hit and slightly overthrown, which is pretty standard for a rising wedge before it breaks down. That's looking good to the downside with rising wedge support now in the 2960 area. A high quality RSI 5 / NYMO daily sell signal is now brewing.

SPX daily chart:
On the hourly chart there is currently no negative divergence on the RSI 14, and that has me wondering about a high retest on Mon/Tues before we see a larger move down to set a possible hourly RSI 14 sell signal brewing. Key short term support is in the 3125 area at the 50 hour MA, which has not been convincingly broken since SPX crossed back above it.

SPX 60min chart:
One thing I like to see in a candidate high is a rising wedge within a larger rising wedge, as these are frequently termination patterns. In this case there is a very nice smaller rising wedge from early October and wedge resistance was hit at the high last week. Possible H&S or double top options to go lower depending on the high tomorrow, and this shorter term rising wedge support is currently in the 3128 area.

SPX 15min chart:
A couple of announcements today. The first is that we are running our annual Black Friday sale on annual memberships at theartofchart.net, which as well as the usual two free months on an annual membership is an additional 20% off. That is running until the close on Friday 6th December and if you are interested, you can find the link for that here.

The second is to mention that our next monthly free public Chart Chat is in a week on Sunday 8th December. If you'd like to attend we will be covering the usual very wide range of instruments and you can register for that on our December Free Webinars page.