The post-Christmas, early January period is bullish for the Dow Jones Industrial AverageSM (DJI) about 50% of the time from 1975 through 2008 and it’s uncertain if the market is setting the stage for a third consecutive bullish run (2009 was up 0.25% and 2010 was up 1.23%).
The returns are based on a study from Arthur Merrill and described by Robert Colby in his book, “The Encyclopedia of Technical Indicators”. A system based n the study buys at the close on the 26th day of the month—or next trading day—and sells at the close of trading on the 6th day of the month—or next trading day—the following month. More complete data for the Dec-Jan period is available in last week’s article.
So far 2011 is highlighting the 50-50 odds with returns that are slightly for the first three days of the eight day period, making an actual analysis of conditions more relevant.
Current Conditions
Following the format from last week, the analysis begins with two charts for SPY, the ETF proxy for the S&P 500® Index. An additional daily chart for the VIX®—the CBOE Volatility Index®—is also included. Below these are the current weekly and daily charts for GLD.
Chart Specifications
The charts include various technical tools as list below. Settings for indicators based on price appear in parenthesis when applicable:
- Trend: Linear Regression Channel with beginning and end construction dates
- Trend: 50-day & 200-day EMAs for daily charts, 20-week & 40-week EMAs on weekly charts
- Trend: ADX & +/– DI:
- Trend: Cardwell’s RSI Bullish & Bearish ranges (see July 2008 Analytical Toolbox)
- Momentum: RSI (14), MACD (19, 39, 9 for long-term bull or 12, 26, 9) & ROC (34, 21 or 8, 4)
- Relative Strength Comparison: smoothed relative ratio
- Volume Bars
Figure 1 SPY Monthly Chart with Trend & Volume (12/29/11)
The current long-term trend for SPY remains bullish as price closes the month in its upward trending regression channel. RSI remains in a bullish range (between 40 & 80), is above the 0 level and flat. Volume was low in December, falling well short of its 10-month simple moving average [SMA]. Overall, the monthly chart still displays a bullish picture.
A second consecutive inside month occurred in SPY, but not all major averages. Regardless, the potential for a reversal of the long-term trend for SPY warrants monitoring.
Figure 2 SPY Weekly Chart with Trend, Momentum & Volume (12/29/11)
The weekly chart for SPY displays a long-term bull with a price bar that has returned to its long-term upward trending channel. Lower boundary support for SPY next week is at the $124.60 level.
RSI remains in a transitional range (between 40 & 60), but met with resistance at the 9-week SMA. RSI is currently moving downward toward potential support at the 50 level. The continued bullish set-up in MACD favors support for both price and RSI on an intermediate-term basis; however, short-term weakness may evolve into weakness on an intermediate basis.
Figure 3 SPY Daily Chart with Trend & Momentum (12/29/11)
The daily chart for SPY displays price outside of a similarly constructed regression channel with the lower boundary of the channel serving as resistance in the short-term. On a positive note, SPY remains above the 50-day and 200-day EMA, which may give price the support needed to gain momentum to push up through resistance.
In the recent move upward RSI fell short of the 60 level, keeping it within a transitional range. Friday’s price action resulted in RSI moving down below its 9-day SMA, which may mean continued bearish movement in the short-term to the 50-level. ROC favors continued downward movement after breaking support of its 21-day SMA.
At this point, the short-term indicators favor continued downward movement in SPY; however, strong support in the form of the 200-day EMA is not far away (approximately 124 on 12/30/11). In addition, RSI support at 50 and ROC support at 1 are also nearby.
Figure 4 VIX Daily Chart with Trend & Momentum (12/29/11)
The VIX remains in its downward drift mode which tends to be favorable for the market. Another characteristic of volatility—mean reversion—has moved the VIX towards its 50-day EMA; however this has not coincided with sustained spiking action upward. Unfortunately, new spikes in the VIX are not predictable. For now it’s simply reasonable to expect continued downward drift in the VIX with moderate moves upward to its mean
Gold
Figure 5 GLD Weekly Chart with Trend & Momentum (12/29/11)
This week’s analysis for gold include bar charts which display the support and resistance being exerted by the lower boundary line on the open-high-low-close for gold on a weekly and daily basis. This week’s entire bar is below the long-term upward trending regression channel for GLD. In addition, –DI continues moving upward (bearish) as the strength of the trend is weakening. ADX is currently below 40 and moving downward.
The slow MACD setting remains bearish. The first sign of pause in the intermediate term decline may be RSI support at the 40 level.
Figure 6 GLD Daily Chart with Trend & Momentum (12/29/11)
GLD is also bearish in the short-term with price completely out of the upward trending regression channel. It is currently below the 200-day EMA for the first time since April 2009 with the 50-day EMA sloped downward. Although RSI is confirming a bounce, it is currently moving in a bearish range.
Next week’s price action will provide useful information on the strength of the long-term channel versus the strength of a bounce that may be underway. If successful, the 200-day EMA will likely serve as a more formidable resistance area.
Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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