Monday's 20-point drainer sank the S&P 500 Index (SPX) by 2.26% to the 870 level for an overall five-day decline of 83 points, or 8.8%. The bears have now successfully worked off the year-end rally that saw eight consecutive up days. The precipitous five-day decline swung the SPX MACD indicator into bearish territory yesterday, a bit of a misnomer when the indicator-change occurs on a Monday in January.
Q: Over the course of its history, how does SPX perform after its MACD indicator swings to bearish on a Monday in the month of January?
A: According to the 11 previous occurrences of this event, EventEdge indicates that SPX has shown a strong bullish edge that peaks four trading days after the event. Thus, the projected date for the peak of the bullish edge relative to the current event date (Monday, Jan.12, 2009) is Friday, Jan. 16, 2009. SPX rallies in 82% of the cases (9 of 11) by an average of 1.6% relative to the close on the event date. The average of the two declines is 0.3%. The overall return of the 11 cases is 1.3%, which, based on the close of SPX on the event date (870.26), provides a target price of 881.57.
This trading idea is very much of the contra-trade type given the route that the SPX index has taken over the past six days, a decline which includes a break of the November-December linear trend line and failure to hold the confluence of the 20-day and 50-day moving averages. As this story goes to print, the overnight low on the underlying S&P 500 futures contract is 857.00; with an average low of 856.25 for the five-day base that kicked-off the year-end rally (see daily chart below), look for position entry in the area of overnight lows, or just under. Consider making this one show intra-day strength before deciding on carrying the swing trade.
To view and modify the event parameters defining this study, click here to launch the EventEdge® tool.
Mr. Jay Pasch is a private futures and equities trader based in Minnesota. He may hold positions in the instruments mentioned in his trading ideas.
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