It's been a while since I posted an update to this chart. The major stock indexes, especially the S&P 500, quite clearly show a regular cycle. In uptrends the cycle lows are the easiest to identify (the Stochastics indicator, not shown below, can help to identify cycle bottoms).
The general stock market has a cycle lasting about one and one-half to two months in duration. Even in the strong uptrend we've seen since 2009, short-term lows about every six weeks are easily identifiable.
During the strongest advances, a clear short-term low may not form. This was the case in June/July of this year. But times like that are the exception. Pick any period of the last decade or two in the S&P 500 and you'll easily identify lows every 1-1/2 to 2 months.
Is trading cycles profitable? No. Cycle trading by itself is a low probability endeavor. However cycle analysis can be combined, quite profitably, with other technical analysis techniques. For me, the greatest value in cycle analysis is for getting a feel for when to turn cautious, take profits, and pare back positions.
The above S&P 500 chart suggests such a time has come. It is going on 2 months since the last clear cycle low. This doesn't mean switch to an overwhelmingly bearish position. It means that this would be a good time to analyze every bullishly-oriented position you have. Check the daily charts. Look for stochastics ‘sell' signals ( Stochastics Buy & Sell Signals ). Look for an inability for the stock to close above recent highs or longer-term resistance. Has your stock lost momentum or has sentiment changed? Look for higher volume on down-close days, and closes near the low of the day.
The seasonal track record of the SP& 500 suggests it is not unusual for a brief pullback before a final year-end rally. Over the next week, the S&P 500 has averaged 0.0% gain, with actual gains in only 43% of the past 35 years. Over the next 5 weeks, the S&P 500 has averaged a 1.6% gain with gains in 77% of the years. So history favors a modest rise into early next year, but it would not be surprising to see a pullback during this coming week.
After a prolonged rise Implied Volatilities on stocks will be low. It may not cost much to put on protective puts as insurance against sudden down-moves. But the best approach may be to take partial or full profits and then sit back and patiently wait for good, higher probability setups for new long stock and/or bullish option trades.
Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day. To find out more, please click on the following link: www.markettamer.com/seasonal
Copyright (C) 2014 Stock & Options Training LLC
Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.
Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.
Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.
As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.
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