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Six-Month Favorable Seasonality Period Beginning
by Carl Swenlin
October 30, 2009
Research published by Yale Hirsch in the "Trader's Almanac" shows that the market year is broken into two six-month seasonality periods. The period from May 1 through October 31 is seasonally unfavorable, and the market most often finishes lower than it was at the beginning of the period. From November 1 through April 30 seasonality is favorable, and the market most often finishes the period higher. While the statistical average results for these two periods are quite compelling, trying to ride the market in real-time in hopes of capturing these results is not always as easy as it sounds. Below is a chart of the "unfavorable" six-month period that just ended. Note that the market finished much higher instead of lower as expected.
The next chart covers the two prior periods. Note that during the unfavorable period the market ended lower as expected, but for the favorable period the market also ended lower because, favorable seasonality or not, a severe bear market was in progress. Regardless of how the market performs on average, every year is different and presents its own challenges, and there is no guarantee that any given period will conform to the average.
It appears that the market has finally begun a correction. On Wednesday prices broke down through the ascending wedge pattern we have been watching for some time. On Thursday severely oversold short-term indicators resulted in a wicked snapback rally that made us wonder if the market was headed for another new high; however, prices reversed again on Friday, taking out Thursday's lows and providing evidence that implies that the correction has more work to do.
I don't have a downside price target, but, as I mentioned last week, there is a 20-Week Cycle low due at the end of November, and I think the correction will continue until then. If that conclusion is correct, we'll need to keep an eye on the 20-EMA. If it crosses down through the 50-EMA, a neutral signal will be generated.
Bottom Line: The S&P 500 broke down from the ascending wedge pattern, and I have cautiously concluded that a medium-term correction has begun, and that it will continue into a price low around the end of November. This is not an auspicious beginning to the new six-month favorable seasonality period, but there will still be plenty of time to recoup correction losses after the low is in place.
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Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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2008 TIMER DIGEST RANKINGS FOR DECISION POINT
#17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT
#40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT
#11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year.
Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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