Thursday, December 21, 2006
The January Effect
The January Effect
As 2006 comes to a close with the Dow Jones Industrials pulling a late rally and a 16% gain for the year, mostly achieved in the 4th quarter. There are two issues at hand here.
#1 Profits from this last quarter will not be sustained:
Recent reactions from the fed regarding interest rates were all but positive. After the last two meetings, a sell off resulted after the news was published. Rates as posted previously, will be a huge factor in the performance of the overall market in the first quarter 2007.
I have numerous trend lines which I have been marking on the charts for the last year or so. All of them seem to hold up nicely and, on average, the price of the index in question is right in the middle of the lines. I believe them to be reasonably accurate and one of the lines is about 9 months old, quality there.
The gains were graduated and moderate. The chart made strong wave patterns suggesting a real trend rather than dumb luck. The strength of the channel was tested on a few occasions, but it has held up for the last 5-6 months.
The Dow chart is beginning to encounter some resistance in the form of both record highs and the relative strength index, or RSI. Investors are always weary to send an index or a security to a new high because it is untouched territory. The history defines the future for most technical traders so no data is available for companies or indices which top old records and rewrite the books.
The relative strength index shows the “energy” of the stock. The RSI is anything but relative as the stock is compared to itself. Investors use the RSI by selling at 70 on the indicator and buying at 30. The indicator is also used as an oscillator with divergence. Divergence shows that the value is strengthening or weakening while the “energy” of the stock is doing the opposite.