Revisited: The Jaunary Effect

It's the last week of May and the SP500 closed at 1087.69 last Friday. As we discussed back at the end of January when it closed at 1073.87...the January Effect implies a high probability of another monthly close lower within a half a year.

Here's the rule for the January Effect...

The old Wall Street saying "As January goes so goes the year."

At the last 30 years when the SP500 closed up for the month of January then 90% of the time it remain positive for the remainder of the year.

2007, 2006, 2004, 1999, 1998, 1997, 1996, 1995, 1993, 1991, 1989, 1988, 1987, 1986, 1985, 1983, 1980, 1979, 1976, 1975, 1972, 1971, 1967, 1966, 1965, 1964, 1963, 1961.

Only three cases where this effect failed and closed down for the year.
2001, 1994, 1966

When SP500 closed down for the month of January it doesn't necessary mean the rest of the year will be down. But since 1930 it usually does predict medium term weakness for the coming months.

In majority of cases, the SP500 closed lower within 1 to 3 months.
2009, 2008, 2005, 2003, 2002, 2000, 1992, 1984, 1984, 1982, 1978, 1977, 1974, 1973, 1970, 1969, 1968, 1962, 1960, 1957, 1953, 1948, 1941, 1939, 1935, 1932.

In rare cases it took a little longer before the SP500 made another monthly low.
1990, 1981 in 7 months. 1956 in 13 months. 1940 in 4 months.

So far the stock market has gone almost four months without making a new monthly low. Could the month of May be it this time? Last Thursday I anticipated a short term rally higher soon. Will the rally be long and high enough to extend the streak to 5 months without making a monthly close lower than January's closed? That I unsure of yet.

Buy Alert: Is this a short or medium term turn?

Talks of a crash flying around as the stock market is at very oversold levels that "should" warrant at least a short term bounce soon. There are hints that a medium term bottom is likely too but we'll see what the stock market gives us for now.

Potential short term pattern developing

As the stock market rallied higher last week and retreated this week, traders are looking for a possible retest or probe lower of the 'crash' lows of May 6th. Another price pattern that could be developing is a 'symmetric triangle pattern.'

Link below for illustration...
http://en.wikipedia.org/wiki/Triangle_(technical_analysis)

What this means is that the stock market (Nasdaq and SP500) could trade around in a coil pattern for another week or so and then make a final 'fake' breakdown below the crash lows before reaching a medium term bottom.

Short term bounce and then retest lower

About two months worth of rising stock market prices ripe away in less than two weeks. That's what being too extremely overbought for quite a long time can do. For the short term we could seen a rally back up toward SP500 1150 and then back down to retest (and likely probe lower) the low of yesterday 1065. An alternative scenario would be retest of the lows first before moving higher.

Unless this is a renewal of a long term bear market...which is in doubt... most indication is to look for a medium term bottom first within 2 to 3 weeks.