06 Apr

6 April 2016 Analysis

On this Day

It is easy to be seduced into thinking that the financial crisis in 2009 was a one-off. It is even easier to be seduced into thinking that government intervention into problems in the financial sector is something new and rare. It would not be true to think that. Here is a headline from this day, from Wall Street Journal in 1990 (5th April – 1990).

1990: The thrift crisis is everywhere at once. The estimated cost of bailing out failed savings & loan companies — pegged just one year earlier at $158 billion — is revised by government forecasters to a minimum of $285 billion to $350 billion. We all erred dramatically on the side of underestimating the problem, says U.S. Senator Jake Garn (R-Utah).

Finally on this day in 1998, the Dow passed 9,000 for the first time.


April 6 2016 chart 1

Chart 1 : 30 years of closing prices in Dow Jones

Of course it is important to prepare yourself for the trading day. If you are a trader – day trader or position trader – you need to do your footwork. However, it is very important to bear in mind that it requires a combination of a rigid and flexible mind to be a good trader. You need to be flexible when circumstances dictate it, and you need to be stubbornly rigid when you are in a good trade, and your mind plays tricks on you to tempt you to take your profits.

Chart name: 30 years of closing prices in Dow Jones

This chart is very simple. It shows the distribution of the Dow Jones index closing prices for the last 30 years – in percentage terms. There are about 7400 observations. The spikes you can see on either side are the most extreme days.

At the left you have the extremely negative days. There are some minus 10% days in there. On the right side you have the extremely positive days. There are some 10% days in there too.

Otherwise this looks like quite a symmetrical chart. AND IT IS. So what is the purpose of this chart? The answer is simple: the distribution of positive and negative closing days over the last 30 years is roughly 50/50. The exact answer is 47% negative closing days to 53% positive closing days.

So there is a slight bias for a bullish close, but it is marginal.

It is for this reason that it is incredibly important as a day trader to gauge the mood of the day, and to cultivate a flexible mind-set


April 6 2016 chart 2

Chart 2

With the statistics above in mind, the first chart shows the Dow Jones index over the last 10 months. We are currently trading just shy 18,000. The way I interpret a chart like this is by thinking that a test of the old highs around 18,000 will need to be tested by the buyers and sellers. If you have been a buyer on the way up from the lows in February this year, you would most likely also be aware of this old top October and December.

The odds of profit taking coming as we enter the statistically weak time of the year are a concern for the bulls. The time period from May to October tends to produce returns that historically are weaker than the time period from October to April. You have probably heard the expression “Sell in May and Go Away”.

Tops and Bottoms are rarely made in one day. It usually takes place over a period of time. Take a look at the highs and lows of this chart. They are all made after the market had re-tested the price area.

April 6 2016 chart 3

Chart 3

For those of you who like Fibonacci, the SP500 made a perfect 61.8% retracement last night. In fact it was quite the sneaky test of the lows from early April. A move below the lows of last night will in my mind have negative implications. However, with this Fib pattern in mind, I will look for the LONG side in the early going today.

This can of course change. However, Asia had every reason to be negative overnight, but actually put in a display of strength. I believe this will carry over into European shares. As I said earlier, this is not a full day forecast.

April 6 2016 chart 4

Chart 4


Chart 5

Chart 5

Chart 4 shows the bloodbath in Europe yesterday, but charts 5 shows there is no follow through in Asia. That can give rise to some optimism ahead of the trading day today.

See you tomorrow.

Tom Hougaard

Tom Hougaard