Category Archives for "Technical Analysis"

Is the Santa Clause Rally Real?

Is the Santa Claus Rally Real?

When traders talk about a “Santa Claus rally”, they are normally referring to an increase in the stock market that occurs in the last week of December and lasts through the first two trading days in January. But like many market axioms, we have to wonder to ourselves whether it is true or not. And even if it is true, how much of a “rally” are we really talking about?

We realized that we are able to easily analyze the Santa Claus rally. Using our Seasonality Module, we are able to determine the average gains or losses for any index or security over a certain period. For example, we could look at monthly seasonality in order to determine which stocks are most likely to post gains in July. Or we could see if the broad market had a seasonal tendency, like determining if the Santa Claus rally truly exists.

Weekly Seasonality Indicator Plotted on the Chart of the S&P 500

This chart shows the S&P 500 Index, focusing on the last week of December 2018 and the first week of January 2019. We can easily see that we did in fact get a rally in the Santa Claus “zone” in that timeframe.

Below the chart we have plotted the Weekly Seasonality indicator. It is looking at the percentage gain/loss of the index for each week over the previous ten years. The indicator shows that we average a gain of almost a half of a percent in the last week of December. So while the Santa Claus rally is not a sure bet, it does actually occur more often than not.

One more thing – notice the seasonal reading in the last week of November. The Seasonality indicator shows that the index averages of gain of over 2% around Thanksgiving. So while the Santa Claus rally is nice, maybe we should focus on the Turkey Rally in the coming years!

Power of Dynamic Higher Time-Frame Analysis

OmniTrader and MTVision can use two different
methods in order to calculate and display higher timeframes.

The Previous Bar Method will use the value returned from the most recently completed bar of the higher timeframe.

In the example for ALL, we have plotted a 14 period Simple Moving Average targeting the Weekly Timeframe on a Daily Chart. Notice how it renders in a “stair-step” manner. That is because it only updates once a weekly bar has competed. So it will return the same value Friday through the following Thursday and then update on the next Friday.

The Dynamic Method will calculate the prior week’s bar on EVERY DAY, e.g., a Tuesday-Monday bar, Wednesday-Tuesday bar, and so on. This provides the benefit of the Weekly view, with the additional benefit of capturing changes that happen during the week.

Here is the same chart for ALL, except we changed the SMA to use the Dynamic Method. Notice it changes on a daily basis. This is because it is using 5 “virtual SMA’s” for calculation. So on Tuesday it is using the Wednesday through Tuesday SMA values, and then on Wednesday it’s using the Thursday through Wednesday SMA values, and so on.

The Dynamic Method is exclusive to Nirvana Systems and OmniTrader users. The benefit of this is clear when you calculate indicators on Dynamic Weekly, because they show the effect of sudden price changes in the middle of the week, without losing the benefit of the weekly timeframe, which is to measure general movement over time.

Reversal Trade Alert – HOLX

Reversal Trade Alert - HOLX

Healthcare stocks have taken a beating over the last few days, but this might be an opportunity for the bulls. The sharp selloff on many of the healthcare stocks has been dramatic, but some them look poised to get at least a short term bounce. Take Hologic (HOLX) for example.

Hologic fell hard last week with some sharp selloffs on Tuesday and Wednesday, but Thursday shows that bearish move may be coming to an end as price finally seemed to find its footing around the $43 level. This level also represents the 50% retracement level, so buyers should see this as a strong opportunity. Watch for at least a short term bounce as the bulls look to take an advantage of a value play.

Jeff Drake
Director of Trading Technology
Nirvana Systems, Inc

Big Profits from Inverted Head and Shoulders Break

Big Profits from Inverted Head & Shoulders Break

One of the most rare, and profitable, chart patterns is the Head and Shoulders pattern. But you know what is more common and even more profitable? The Inverted Head and Shoulders!

Head and Shoulders patterns occur when a support is established with three peaks above the level. The outside two peaks are similar in size, while the middle peak is higher. This creates a visual of a head (the middle peak) with shoulders (the outside peaks). The level is referred to as the neckline, and most traders look to trade the break of the neckline.

The Typical Head and Shoulders Pattern

Explosive Breakouts Ahead

Inverted Head and Shoulders Pattern Break on XLF

Now, if we take that pattern and turn it upside down, we have an Inverted Head and Shoulders Pattern. This type of pattern can lead to explosive breakouts once the neckline is broken. This pattern has been prevalent in the current market.

OmniTrader provides Chart Pattern Recognition Technology, and generated these great trades recently. This chart for XLF shows a slanted neckline, but otherwise a well formed Inverted Head and Shoulders Pattern. The break of the neckline is occurring now, so there should still be plenty of upside to this trade.

Inverted Head and Shoulders Breakout on MMM

Another excellent trading opportunity OmniTrader found is MMM. Currently MMM is breaking through the neckline of an inverted Head and Shoulders Pattern. The shoulders are a bit lopsided, but the stock is finding strength after the neckline break.

A Perfect Setup

Strong Breakout on Inverted Head and Shoulders Pattern

And finally, here’s a picture perfect Inverted Head and Shoulders Pattern on PATK. Not only is pattern flawlessly formed, but the energy in the breakout shows why these patterns are well-regarded by traders.

Head and Shoulders and Inverted Head and Shoulders patterns can occur in any timeframe, but more common on daily charts. If you aren't currently using OmniTrader’s Chart Pattern Recognition, take the time and look at many charts and see if you can find this setup. If you do, look to play the breakout for a strong move and impressive gains.

Jeff Drake
Director of Trading Technology
Nirvana Systems, Inc.