SEASONALITY FAVORS THE BULLS
The latest from Decision Point:
Research published by Yale Hirsch in the “Trader’s Almanac” shows that the market year is broken into two six-month seasonality periods. The period from May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 seasonality is favorable, and the market most often finishes the period higher. While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds. Below is a chart of the “unfavorable” six-month period that just ended. Note that the market finished much higher instead of lower as expected.
The next chart covers the two prior periods. Note that during the unfavorable period the market ended lower as expected, but for the favorable period the market also ended lower because, favorable seasonality or not, a severe bear market was in progress. Regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average.
It appears that the market has finally begun a correction. On Wednesday prices broke down through the ascending wedge pattern we have been watching for some time. On Thursday severely oversold short-term indicators resulted in a wicked snapback rally that made us wonder if the market was headed for another new high; however, prices reversed again on Friday, taking out Thursday’s lows and providing evidence that implies that the correction has more work to do.
I don’t have a downside price target, but, as I mentioned last week, there is a 20-Week Cycle low due at the end of November, and I think the correction will continue until then. If that conclusion is correct, we’ll need to keep an eye on the 20-EMA. If it crosses down through the 50-EMA, a neutral signal will be generated.
Bottom Line: The S&P 500 broke down from the ascending wedge pattern, and I have cautiously concluded that a medium-term correction has begun, and that it will continue into a price low around the end of November. This is not an auspicious beginning to the new six-month favorable seasonality period, but there will still be plenty of time to recoup correction losses after the low is in place.
Source: Decision Point
“I don’t have a downside price target, but, as I mentioned last week, there is a 20-Week Cycle low due at the end of November, and I think the correction will continue until then. If that conclusion is correct, we’ll need to keep an eye on the 20-EMA. If it crosses down through the 50-EMA, a neutral signal will be generated.”
What is a neutral signal? Does that mean upward movement has ended? (Bearish) Or that the correction is over? (Bullish). I would that that the 20-EMA crossing down through the 50-EMA would be bearish, but I am not familiar with the term “neutral” regarding movements in moving averages.
If the market corrects to 1020 and then rebounds strongly, will the technical analysts change the bottom line on the wedge to run from the March low to the 1020 (or any lower) support?
The new highs in September seem to have moved the upper line higher (making the wedge less narrow), but the bottom line has been in place since July 10. If the bottom line on the wedge moves lower (making the channel wider) is that somehow bullish?
We will see highs higher than anyone thought possible for this market after a down turn to the mid 900′s in my opinion (I don’t know if we see 1100 again before then or not I am not great at calling very short movements). Once all the retailers and fund managers see things are edging back up again things will get explosive. People are beginning to say this might be another down turn (even though they have been saying this every time the markets got toppy), not yet…………….In any case a lot of money can be made if played right.
Define “highs higher than anyone thought possible”. Ken Fisher has pronounced in his Forbes Column (see Via The V, Forbes, November 2) that we will see the market 20%-25% higher by January 1. The would be 1280 to 1340. Either you think it will go higher yet or Ken Fisher isn’t “anyone”.
By the way, Ken still thinks a perfect V is possible and the market might even see new highs (i.e. above 1562) by July 2010. (16 months down, 16 months up). I personally think he hallucinating, but anything is possible with the printing press running full speed in Washington.
I don’t believe in a V-shaped recovery and I don’t like calling exact numbers because that would just be a guess right now. Let’s just say at least 10% over our most recent high which could be a substantial move if we get a pretty good correction.