The January Barometer

The January barometer is a principle based in tape reading that I consider each year to plan my approach to the markets.  The January barometer is the theory that the movement of the S&P 500 during the month of January sets the overall direction of the stock market for the year.  This concept was created by Yale Hirsch in 1972.  From 1950-2011 there have only been 7 years where this concept was off the mark.  This gives it an 88.5% accuracy rate. When you take into consideration the impact of some historical events such as Vietnam, the Gulf War, 9/11 and the flash crash, it could be argued that this is a conservative number.  So, how can you use it to be a better trader in 2013?  It’s simple, read the tape.

By recording the opening price on the S&P 500 each year and comparing it to the January close, it’s easy to determine the projection for the year based on the barometer theory.  I would suggest that you also consider using the first week of January in the same manner.  Use the open of the year and compare it to the Friday close on the S&P 500.  Based on seasonal trends, this will give you a preview of the month of January.  In recent years, the first week has been a more accurate predictor than the month as a whole.  Based on the first week of trading in the S&P 500, January will be an up month.  If we confirm this trend by remaining up through the close of January, we should be looking at an overall up year.  Once this trend is determined it’s prudent to then use seasonality to find good opportunities.  For example, if stocks are your vehicle of choice, I like to use our seasonality software DTIc(dtic.dtitrader.com) to find plays based on smaller seasonal trends throughout the year.  By using this tool to identify and trade stocks that follow the trend that the barometer has already predicted, you can further increase your odds of a winning trade. So far this year, there are two numbers you need to know to use this theory to your advantage.  Trading above these numbers tells you to be long:  S&P 1443;  Dax 7746

The key to success in using any seasonal data or theories is to always rely on the numbers.  Just because the theory says we will finish higher at the end of the year doesn’t mean we won’t be down in between.  So don’t forget to read the tape.  The premise of tape reading is a time-tested and proven method, not to mention it’s a simple concept to follow.  If we are above the year, month, and week open, you should be thinking long.   If we are below the year, month, and week open, you should be thinking short.  Find your entry and execute your trade accordingly.  By sticking to the numbers and using the DTI RoadMap™ software and DTI Compass™, I have been able to consistently and accurately determine trend.  This has allowed me to answer the most crucial question in trading with increasing accuracy.  When you too can answer this question accurately, you will be successful.  So what’s it going to be?  Long, Short, or Out?

For More information on Diversified Trading Institute, please visit our website @ www.dtitrader.com or call 1-800-745-7444

DTic Seasonality Software-  dtic.dtitrader.com