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STRATEGIES


Seasonal Surprises And March Machinations

02/22/13 09:09:06 AM
by Billy Williams

February, the typical seasonal weak link, is on a tear as the SPX goes higher, but March may be the month that tells us whether the market catches fire, or fizzles out.

Security:   SPX
Position:   Buy

According to the "Stock Trader's Almanac," the third year of a new decade is not a particularly strong performer, especially when factoring in February being the statistical weak link in the "Best Six Months" category, which started in the latter half of December up to the end of May. However, if the market was to roll over in a weak year during a weak month, February obviously missed the memo, as it has been on a tear since day 1.

Surging more than 40 points since February 1, the market rallied and then the following day looked as if it was going to roll over and give in to weakness. But then it managed to rebound and has been on a steady march upward ever since, while maintaining a healthy distance by trading above its 10-day simple moving average (SMA) and 50-day SMA. See Figure 1.

The SPX has been comfortably trading higher on lower volume and is beginning to attract the attention of investors, who have remained on the sidelines and are beginning to wonder if this time is different and maybe it's a good idea to get into stocks again.


The New Year ushered in a massive rally on January 2, 2013, and the five-day rule by Yale Hirsch has signaled when the first five trading days of the New Year closed upward, forecasting an up year overall.

Surprisingly, January's momentum has spilled over into February and seems to be gathering steam.

However, a note of caution is worth mentioning, since no pullback has occurred to give bulls a breather and therein lies the warning as the month of March approaches. (See Figure 2.)


FIGURE 1: SPX. February is usually associated with weakness and an expected rollover from the bulls to the bears, but surprisingly, the month has performed incredibly, with its momentum potentially spilling over till March, where we will see if the rally gathers steam or fizzles out.
Graphic provided by: www.freestockcharts.com.
 
Typically, March shows great strength in the first half but the second half tends to give in to weakness, even if temporarily.

The warning for traders is that since February has failed to fulfill its normal cycle of weakness, then will weakness appear in March as expected and if so, will it be greater than normal weakness since the market didn't show any in the previous month?

Adding to that is the extremely narrow trading range that the SPX appears to be developing and though it is trading higher, as mentioned previously, the trading volume has been noticeably light.


For a technician, these moments in the market can be maddening because on one hand, the market is trending higher and finding support along its 10-day SMA, but on the other hand, it is trading upward on light volume and the normal seasonal patterns are not playing out as expected.

That said, when in doubt, trade with the trend and fall back on your position sizing.

The way to go forward is that if you have a position, then stay alert and follow your trade management rules while emphasizing defensive profit-taking and exits if things go sideways.


FIGURE 2: SPX. For shorts, any pullbacks that occur should be cautiously acted on, as the bulls are within range of taking out the 1576 level on the SPX. More than a resistance point, this has been a psychological stopping point for traders and investors alike for the last 13 years since the dotcom era crash back in early 1999.
Graphic provided by: www.freestockcharts.com.
 
If you don't have a position, then it's better to wait and see if the bulls pour into the market and push it higher on higher trade volume, and then pounce. On the opposite end, if the market pulls back, then be cautious about aggressively shorting the market because the bulls still seem to be dominant and with the SPX within shooting range of the 1576 level, it would be foolish to get in front all that momentum as the bulls are likely to try and take that level out in convincing fashion.

Better to wait and latch onto that wave all the way to 1576 and, hopefully, beyond.




Billy Williams

Billy Williams has been trading the markets for 22 years, specializing in momentum trading with stocks and options. You can read his commentary at www.StockOptionSystem.com where you can get a free report "Fundamental Trading Keys For The Aspiring Trader".

Company: StockOptionSystem.com
Website: www.StockOptionSystem.com
E-mail address: stockoptionsystem.com@gmail.com

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