Time for a Pause

In the December 13th newsletter I suggested the S&P 500 would likely form a cycle bottom, saying “The markets move in cycles. They always have, it's human nature. Looking at the S&P 500's chart, over just about any time period I pick, I see a roughly 1-1/2 to 2 month cycle. Sometimes the cycle lows occur 1 month apart, sometimes 2-1/2 months apart, sometimes it is hard to identify a low, but overall, short-term cycle lows average a little less than 2 months apart. Using that reasoning, and the Stochastics indicator to help confirm actual and likely lows, I feel that nothing is unusual and I can expect another short-term low to be set within the next week or two.

The date I wrote that turned out to be a short-term low. In the two weeks since then, the markets have rebounded 3.9% off that low.

If the S&P 500 continues its recent cycling action, we can expect a short-term high sometime soon, and a short-term low in mid-January to mid-February, which would be in the Q1 earnings release period.

Cycle analysis is not an exact science. I do not throw Fourier analysis at it, I do not use artificial intelligence, I do not apply proprietary algorithms. If anything, the most useful tool I've found is to just stand up and view a chart from across the room – if there are cycles on a chart, they stand out when you are standing away from the screen.

This just comes down to way to classify the probability of trade success in the near future. Since we are two weeks and 3.9% off a clear short-term low in mid-December, the odds favor a short-term high in the near future, followed by another short-term low in 3-6 weeks. New long positions in stocks or new bullish option positions right now will have a lower probability of working than if entered just as the stock or the markets are coming off a short-term low. The stock, or overall market, may not log much additional upside, even if it is several weeks before a short-term high is set.

If you have existing stock positions, this may be a good time to write At-The-Money or In-The-Money January calls against if for some income and to lower the cost basis of the stock. If the market does start pulling back within the next few weeks, you may be able to capture all of the option premium by the time the January options expire (3rd Friday of January).

For the next couple of weeks, watch the market for any change from its recent exhuberance. When it starts, take profits, trim the weaker positions, and consider adding some downside protection (puts or inverse market ETFs).

Incidentally, the VIX is back down at one of the lowest levels of the past 5 years. This suggests there is plenty of optimism in the market and little fear. That condition is typically resolved with a market pullback.

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, including the answer to the above question, type in www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2013 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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