January 3, 2013
Uncategorized
By Geoff Bysshe
The phrase “January Effect” has come to describe many different beliefs about how January can create some unique market insight. These beliefs range from tax loss selling in December creates buying opportunities for traders willing to hold into the first week of January, to the belief that the outcome of the year can be predicted by the direction of the first several days or the whole month of January.
What I’m about to show you is not based on any other January Effect strategy or belief. This is a simple concept based on the fact that market participants tend to reassess their outlook, and reallocate their capital with a fresh start at the New Year. The result is that early January can create significant highs and/or lows in the markets and in individual stocks.
I’m not looking to predict the next several months, let alone the whole year. I simply want to know which stocks have a tradable bullish or bearish trend. January provides a number of great ways to find this type of trading edge. Here’s one based on the first trading day of the year.
If the beginning of the year is a new start, then treat it as one. Simply consider the first trading day of the year to be the first day (“Day One”) of a trend. Of course one day does not make a trend, so you’ll need to wait for the following days to determine the trend’s direction. To determine the trend you simply consider the high and the low of Day One of the year to be the determining factor of your trend bias. If the market is trading over the high of Day One then the trend is up, and if the market is below the low of Day One then the trend is bearish.
I like to combine this concept with a few other common sense technical criteria to increase the odds that this new trend will continue. Here are a few other factors to consider.
This is a simple concept that works incredibly well for day trading and swing trading. Keep it simple. Focus on the clear patterns, and I you’ll have this refreshing way to start off every New Year with an edge.
I expect some common questions will be:
Question: How long will the trend last?
Answer: You don’t know, use a trailing stop. Or just use this knowledge to know whether to even consider a trade at all.
Question: What if the market takes out one side of the range and then reverses, and takes out the other side of Day One’s range?
Answer: The same rules apply. Review the points above about the big picture considerations. It could be that the reversal is an even bigger opportunity.
Below you’ll find two screen shots taken from HotScans where I used it to scan for the stocks with the highest relative volume that either ended the day strong (in the top 10% of their range) or weak (in the bottom 25% of their range). This is a good starting point for finding stocks that may continue in their Day One direction. If you look through the daily (and weekly!) charts of these symbols you’ll find quite a few charts that could be great trades if the Day One range breaks out.
The images below show the top 25 stocks or ETFs for both scans. If you have HotScans you may want to do what I do, which is to scan for the top 100, and put them in two portfolios of strong and weak stocks. This gives you a set of stocks to scan for the next several weeks for trading opportunities.
Additionally, I’ll use HotScans to scan the whole market on “day two” for the stocks breaking and closing beyond the Day One range.
If you want to learn more about the functionality of HotScans there is a quick video here (will open in a new tab or window):
https://marketgauge.com/category/hotscans-blog/hotscans-tutorials/
Here’s the HotScans setting to use to scan for where the stock it in its day’s range so you can determining the “weak” or “strong” close. This is the “weak” setting I used - bottom 25% of the day’s range. I used top 10% for strong but bottom 25% for weak because the market closed so strong (within the top 10%):
Here’s a list of unusually large volume and a strong close:
Here’s a list of unusually large volume and a weak close:
