By Paul Cherney
The markets reacted "in kind" to the uninspiring December non-farm payrolls number; neither bulls nor bears were inspired to act aggressively. The markets are waiting for a headline to generate a reaction (bullish or bearish).
As mentioned a few trading days ago, on Tuesday, measures hit such levels of negativity (daily bar charts) that there usually is a period of basing, or a move lower in prices that follows before the markets can stage a lift of more than just a few trading days.
Usually, though, there is an oversold bounce which I thought should have happened on Wednesday (wrong). After the bounce (that can last 1 to 4 trading days), price weakness usually follows for a re-test of the lows (or lower), but then there can be a good lift that surprises everyone. The pattern is not playing out and the potential for sloppy sideways price action with a negative bias is in place (as the markets await a bullish headline).
Longer-term measures of price combined with volume have weakened to neutral readings, but there is usually a lingering positive bias after the kind of lift we saw in the fourth quarter. Some sort of a wave of buying should occur in January, the question to be answered (if there is a wave of buying) is: will a lift in prices draw additional buyers into the markets. An attempt to answer that question can only occur once there is an opportunity to measure the volume and breadth of a move higher. I can't measure the internals of a lift in prices until one occurs, but those measures might afford me some insight into the ability of a lift to follow through higher.
The seasonal strength for the month of January favors a positive bias for prices but one aspect of a positive market is the ability of prices to sequentially break above resistance levels, and these markets have not demonstrated that ability.
I reviewed weekly charts for the S&P 500 and it would be a very rare occurrence (by my judgement of charts and indicators), for the S&P 500 to experience a dramatic decline from current levels, But I would become concerned about additional weakness if the index closed below 1,167.
Immediate intraday support for the S&P 500 is 1,184-1,180.40. The next layer of support is a broad band of prices that overlaps at 1,186-1,167 which is why short-term downside is probably limited, because there is so much price traffic in this area.
The Nasdaq has immediate support 2,085-2,052.80, then 2,044-2,025.
S&P 500 resistance is 1,185-1,195, then 1,205-1,209.53. There is more formidable resistance from July, 2001. The older the resistance, the less precise you can be, but here is the read from the 60-minute charts from July and August of 2001: resistance is 1,215-1,226.27.
Nasdaq resistance is 2,097-2,118, then 2,132-2,152, with a stacked shelf at 2,155-2,165.
Anytime resistance is exceeded it must be treated as support until broken. Anytime supports are broken they must be treated as resistance until exceeded.
The first five trading days of January have seen a net loss for the S&P 500. This does not mean anything. Historically, since 1958, a down first 5 trading days in January have correctly predicted a down year for the S&P 500 8 out of 16 times, or 50% of the time. Flip a coin.
Since there has been so much talk about first up or down, January up or down as predictors of the year, I ran a program that generated more than you ever care to know about the predictive quality of January performances for the S&P 500. Here are the results (all results based on price changes in the S&P 500 from 1958 to 2004).
Up January, Up Year: An up January has correctly predicted an up year for the S&P 500 27 out of 31 times or 87.1% of the time. (This is the way Hirsch in the Stock Trader's Almanac calculates it: the performance for the year includes January?s performance.) UP JANUARY, UP FEBRUARY THROUGH DECEMBER: An up January has correctly predicted gains from the close of January to the end of the year 26 out of 30 times or 86.7% of the time. I included this calculation because if you were going to wait for the end of January to find out if January was an up year before you committed funds, then you would not have been able to participate in the January move up.
Down January, Down Year: A down January has correctly predicted a down year 10 out of 17 times or 59% of the time. (This uses January?s performance in the performance for the year.) DOWN JANUARY, DOWN FEB THROUGH DECEMBER: A down January has correctly predicted a loss from the close of January to the end of the year eight out of 17 times or 47% of the time.
First 5 Trading Days: This is supposed to be a predictor of January?s performance.
An up first 5 trading days means a net gain for the period. A down first 5 trading days means a net loss for the period.
First 5 Up has correctly predicted an up January 23 out of 31 times or 74% of the time (includes first 5 trading days in January?s performance).
First 5 Down has correctly predicted a down January nine out of 16 times or 56% of the time (includes first five trading days in January?s performance). The first three trading days through January 5, 2005, the S&P 500 is down 2.3%.
First 5 Up has correctly predicted gains from the close of the fifth trading day in the year to the end of the year 23 out of 31 times or 74% of the time.
First 5 Down has correctly predicted a loss from the close of the fifth trading of the year to the end of the year eight out of 16 times or 50% of the time.
No matter how many ways you want to look at the historical performance of January as a predictor of the year's performance, the only observation that I would bother to pay attention to is: if January is up, historically, since 1958, the S&P 500 has seen gains in the rest of the year roughly 87% of the time.
Cherney is chief market analyst for Standard & Poor's