What Might January Bring?
Day after day on my website
I’ve noted that we’re in an intermediate-term trading range. My
research site recently reported subnormal market returns following inside
days (ones in which we make higher lows and lower highs relative to the previous
trading session). Given this performance during narrow trading days, I
finally decided to take a hard look at our longer-term range and see what it
might mean for the start of the new year.
Perhaps it would surprise you to learn that we are tightly
range bound to a
recently unprecedented degree. Looking at four-week trading ranges in the
S&P 500 cash index since February, 1996 (N = 510 weeks), I find that the
average trading range–the range from the four-week high to the four-week
low–is 8.08%. By comparison, our current four-week range is 2.32%–the
lowest four-week range during the entire period. That got me thinking:
What happens four weeks following narrow four week ranges?
It turns out that volatility–the size of ranges–matters. The average
four-week change for the sample overall is .64% (292 up, 218 down). When
we have had a four-week range of less than 4%, however, the average price change
over the next four weeks is -.70% (15 up, 23 down; N = 38). Compare this
to the average four-week change following ranges that exceed 14%: up by 3.29%
(33 up, 12 down; N = 45).
Examination of the specific low and high volatility occasions suggests that
topping markets tend to feature narrow trading ranges and bottoming markets are
characterized by much wider swings. Buying narrow markets and selling
volatile ones is not a winning strategy at all. The current pattern
certainly looks more like topping than bottoming, a cautious signal for January.
Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
He is currently writing a book on the topics of trader development and the
enhancement of trader performance.