Sunday February 11th 2018
Friday Factor
Regarding my comment to the ‘Friday Factor’ (where Friday is the least likely day to close heavily in the red ) the rule held true.
However, there was a twist in that the market first made a new low (2532.69), down 48 points from Thursday close, making a sharp reversal in the afternoon to close 38 points up on the day.
Sharp turnaround rallies in the afternoon such as these are typical bear market behaviour. It doesn’t mean we’re in a bear market, but it is definitely trading like one at the moment.
‘100 points nearer the 200MA’
Also, we saw a test of the 200MA which has held first time and where Fridays rally began. The last time the 200MA was tested was the November 2016 low. (See chart)
The 200 MA and Bull% indicators are (for me, in terms of context) the tools that are appropriate in the current situation, which is why this thread is going in the current direction.
Some History.
I took a look back at the significant market drops in August 2015 and Feb 2016 focusing on the 200SMA and $BPSPX
Chart-1
Three things to note with the drop in 2015 compared to the current market:
- The decline began when the market was much closer to the 200SMA
- The market had been in a sideways range for several months.
- The $BPSPX was highest in February (75.80) when the S&P 500 high in February was 2119.59, dropping to the low 50’s by August when the Index had only gained another 15 points. (The year high was 2134.72)
The next time you read ‘They don’t ring a bell at the top’, you might reflect on the difference between simple T.A. and studying the works of W D Gann in the hope that you can time market turns to the exact day.
Should you be bullish when a market is making no real headway while internal strength deteriorates from an over bought condition? Divergence.
2016 (Chart 2)
Note the divergence at the double bottom in Jan/Feb and the Bull%
Jan 1812.29 (23.40)
Feb 1810.10 (27.60)
A little higher, though still in the oversold zone but each day thereafter it climbs rapidly-
29.80- 35.80- 44.50- 46-50- 47.20- and 58.40 by the end of the month with price gaining 150 points.
2017/8 (Chart 3)
The indicator gave a good overbought signal in March. It never got into the oversold zone.
This year the indicator was overbought in the low 80’s until the drop and closed at 40.40 on Friday.
You can’t expect one tool to answer all the questions. But I think it does a pretty good job at stopping you buying the tops and selling the bottoms. It also is a good balance to the argument that price alone tells you everything you need to know.
What Next?
What about this current drop? Is it over already/Is there more to come/Is it the start of another Bear market?
In terms of the Bull% it has already done it’s job. I wouldn’t base a trading decision on the current reading until/unless it drops into the oversold zone next.
For me, when it is at extremes, it is useful. Otherwise it stays in the tool box.
But if it should drop to oversold you could use that reading to attempt, to quote Warren Buffett, ‘be greedy where others are fearful’.
Something to keep an eye on.
