December 25, 2018
Trades & Tutorials
By Geoff Bysshe
Every year January sets up price levels that provide great trend trades and market direction insight for the entire next year.
This is not the typical adage of, “the market will go the way of January.”
For example, January 2018, was an unusually strong one, and shortly you’ll see why the pattern it created is contributing to the one of the worst December’s in decades.
In fact, in this post, I’m going to focus on how you can use one of January’s patterns to avoid major bear markets.
Trading The Line
By combining a few simple trading tactics, you can turn January into a very powerful market indicator and source of trend trades.
The trading tactic of “trading the line” begins by identifying a price level on the chart that will be an important inflection point. An inflection point is a price that you can expect the market to react to by either accelerating its trend or reversing.
The January patterns and price levels will define the inflections points for you.
The tactic of trading the line trades the market long above the line, and short below it. Simply put, you’re bullish when the market is over your line and bearish below it.
However, you don’t necessarily enter both bullish or bearish trades around the same line.
For example, the emphasis in this post will be that you want to be on high alert for bearish market action, or at least NOT LONG under our January Low line.
We teach in-depth tactics and patterns for trade entries and exits in our trading courses like AM Trader and Trading Essentials.
If you are a member of our AM Trader and you’re familiar with how to trade the 30-minute opening range, you can apply the same tactics here!
However, if you’re not a member of any MarketGauge services that teach this concept, you can get started by having the mindset illustrated in this image below.
The red dotted line is the "Line". Above it you're neutral or bullish, but below this line you're BEARISH!
The January Range Inflection Points
The January inflection point you want to focus on is the low of the month.
When the market is trading below this level, this trading tactic is bearish because the market is vulnerable to significant declines.
This may seem too simple, but as you’ll see in the charts and video below, it works.
There are some logical reasons for why this simple inflection point is so powerful. Consider these impacts on the market’s condition when the January low is broken:
This inflection point is not limited to the general market.
It works on individual stocks, ETFs, commodities, currencies, etc.
Below you’ll find 2 charts that show how this worked since 2008. Note that the January low inflection point should be considered an area on the chart, not an exact price.
For example, you’ll see in 2007 that the January low area acted more as support for a reversal than a breakdown.
Notice in the chart above that the initial breakdown in 2008 was not able rally back into the January range by very much. This was a clue that the second breakdown might turn into the major decline that it did.
In 2011 the initial breakdown lead to an immediate decline of almost 12%. Even though this decline recovered, this is the type of move you can avoid or trade from the short side rather than be surprised by.
In 2018, the beginning of the year’s volatility set up the 2600 level as a critical of support just below the January low. As a result, it wasn’t any surprise that when the market traded below that level in December the weakness accelerated into a major decline.
If you’d like to see more examples of how this pattern has occurred since the 1960’s, watch the video below.
In this post, I’ve focused on the January low, but you may have noticed in the charts on this page and in the video that the January high is just as powerful of an inflection point.
In fact, if the January 2019 range could play a significant role in determining if or when the current bear market may bottom.
The Power Of January Get Better
There are additional patterns that occur within January that enable you to catch the big trending months like the bullish trending Januaries of 2018, 2012 and 2013 or the down trending Januaries like 2008, 2009 and 20016.
There are also reversal patterns that help you identify the high or low of January as it’s developing so you can buy or sell these reversals which often remain as the significant levels for much of the year.
By the time January has finished trading, we will have identified 3 important bullish and bearish inflection points that identify trend trading opportunities for the rest of the year.
In our Complete Trader program, we teach these January trend trades and additional patterns that provide great trend trades throughout the year.
We call these patterns “Seasonals,” and we consider their inflection points important enough to be displayed in the results of all the stocks that show up on our Complete Trader trade ideas scans!
If you’re not a member of our Complete Trader program, however, you know now that you should be paying close attention to the January monthly low!