January Magic: This Trading Pattern Works 80% of theTime

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Hey Traders!

As January slips into its final act, the stock market puts on a fascinating display. The S&P 500, like a seasoned gymnast, gracefully arches past new highs, but beneath the headline numbers, subtle murmurs hint at a more nuanced tale. Let’s peel back the technical layers and see if this January fulfills its usual bullish promise.

The chart paints a clear picture. The strong breakout above 4,800 establishes a sturdy support level, a safety net for optimistic investors. While no immediate resistance looms, because this is basically uncharted territory, the +4σ Bollinger Band acts as a cautious stopper, potentially preventing excessive enthusiasm.

The sideways move between 4,680 and 4,800 in December may seem like a distant memory, but it was the springboard for this rally. A dip below 4,680, however, would send icy shivers down investors’ spines.

One potential problem though: the McMillan Volatility Band sell signal lingers, waiting to be neutralized by a decisive S&P 500 close above the +4σ Band. It’s a delicate balancing act – a close call that could trigger a new MVB sell signal down the line.

But hold on, the story doesn’t end there. Equity-only put-call ratios and breadth oscillators show dissent. The average stock, it seems, isn’t quite as convinced by the S&P 500’s triumphant moves to record highs. This narrow market, a recurring motif for some time now, presents a curious paradox. Can the broader market remain grounded while the S&P 500 soars? Time will tell.

Despite their recent downward tilt, put-call ratios remain firmly in sell territory, flashing a bearish warning for stocks. A drop below recent lows, however, would signal a bullish U-turn. Breadth, too, shows mixed signals, currently on buy signals but lacking the usual robust enthusiasm.

Interestingly, a reversal of fortune has graced the New York Stock Exchange. New highs, once outnumbered by new lows, have waltzed back onto the scene, generating a fresh buy signal. This delicate equilibrium can be disrupted if new lows reclaim the lead for two consecutive days, so keep an eye peeled.

The CBOE Volatility Index, remains subdued, hovering around 13. Its buy signal remains in place, guarded by the declining 200-day moving average. A sharp VIX spike, however, could cast a bearish shadow.

Volatility derivatives, with their upward-sloping term structures and VIX futures premiums, maintain a bullish posture. But watch out for a potential bearish flicker: February VIX futures eclipsing March futures.

Now, here’s the cherry on top: a new bullish seasonality kicks in with this Friday’s close. History has shown four lucrative days, and we have a system trade ready to capitalize on this age-old rhythm.

Finally, realized volatility has cooled off, neutralizing the previous sell signal and restoring neutrality. A dip below 8%, however, could pave the way for a future bearish signal.

So, where does this leave us? We remain cautiously optimistic, swayed by the S&P 500’s positive chart posture. We’ll continue rolling calls up and navigating the market with confirmed signals around our core bullish position. Remember, new sell signals don’t always spell doom and gloom – some, as we’ve seen, get neutralized and pave the way for fresh bullish opportunities.

With January nearing its curtain call, the market invites us to a captivating performance. The whispers and cues are there, waiting to be deciphered. Stay with us as we follow closely this development.

– James

I’m A Stock Trader

In the next article: The Fed’s silent period arrives as markets hit highs, leaving investors wondering if rate cuts are on the horizon.

In the bustling orchestra of financial news, a sudden hush has descended. The conductor, the Federal Reserve, has retreated backstage, leaving the market instruments to hum and chirp on their own. This quiet period, meticulously planned like a well-timed pause in a symphony, precedes the first grand act of 2024 – the first policy meeting and, potentially, the curtain call for our current interest rate regime.

The scene preceding this silence was nothing short of dramatic. Just as the Fed’s whispers faded, the market erupted in applause, pushing to all-time highs. It was as if the hush signaled a cue, a silent “show-off!” to investors. Yet, the real star wasn’t market exuberance, but the muscular GDP release, flexing its economic biceps like a financial Hercules. This economic data bolstered the “soft landing” narrative, whispering promises of a graceful descent, not a crash landing.

So why the silence then? Why not bask in the economic accolades and unleash the anticipated rate cuts like a confetti shower? It’s all part of the intricate, sometimes frustrating, choreography of central banking.

Setting expectations, shaping narratives, that’s their hidden stagehand. Those cautious pronouncements, those carefully worded warnings against premature easing, were more than mere words – they were brushstrokes on the canvas of market perception.

In this economic show, even with perfect steps, telegraphing the next move could send the entire performance into disarray. A touch of ambiguity, a dash of strategic silence, keeps the audience guessing, and the central bankers firmly in control.

But let’s not get lost in the metaphor. Behind the hushed tones and graceful gestures, lies a complex game of chicken with uncertainty. Inflation, though tamed, isn’t yet a graceful retiree, and labor markets, while improving, still need time to polish their act.

As Bank of America analysts rightly pointed out, the Fed needs to watch the data unfold, to wait for the next scene in the economic drama before deciding on the final choreography.

This data-driven approach, Powell’s signature move, has its critics, those who yearn for a bolder, more improvisational style. But in this uncertainty, waiting for the music to change before taking the next step might be the safest, most sensible move.

Friday brings the PCE index, the inflation metric that holds the Fed’s heart captive. It’s like a final costume fitting, a last glance in the mirror before the big show. This snapshot will help Powell navigate the coming meetings, shape the steps he’ll take in March, and perhaps even whisper hints of the grand finale in May.

For now, the market listens, swaying to the unspoken rhythms. Rates haven’t dropped yet, the cuts are still a whispered promise, but the market’s confidence, its bullish strut, speaks volumes. The Fed may be quiet, but the orchestra of expectations is playing loudly, a symphony of anticipation as the central bankers wait in the wings, ready for their next measured move.

And we, the audience, can only watch, listen, and hope the performance delivers not only on its economic promise, but also on the unspoken yearning for a smooth, stable finale.

While we may not know the exact timing of the rate cut encore, one thing is certain: the curtains will rise again, the economic ballet will continue, and the maestro will eventually lead us through the finale.

Let’s just hope that the steps are steady, the music harmonious, and the ending one that leaves us all applauding.

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The material in this document is for informational purposes based on our proprietary research. It is not an offering, specific recommendation, or a solicitation of an offer to buy or sell any securities mentioned or discussed herein.

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