I look forward to summer every year. June, July and August bring sun, fun, bikinis, and oh, that’s right – let’s not forget slow moving markets! Every year, the same thing occurs. From January through May, the markets move normally as expected. The following three months of summer bring the slow inactivity every trader complains about. This uneventful market action is to be expected. This lack of movement is indicative of a method that I use on a daily basis – the ABC Pattern. If you haven’t yet watched the video on how to trade the ABC Pattern, now is a good time: Learn the ABC Pattern.
Nearly every trading day, the market starts off normal, slows down, and then speeds up towards the close. This same behavior applies to the trading year. The three parts of the year are historically predictable. With that said, now is the time to rev up your trading engines and prepare yourself for the action that will close out the year!
Starting in September, the trading volume is expected to pick up as the 4th quarter earnings come into play. This year is especially important because of the November presidential election. This coupled with the January Effect (my bullish prediction for 2012) will make the upcoming months worthy of watching.
Let’s look at the specifics…
- Election year – markets usually rally.
- January Effect – markets expected to close higher for the year
- End of the year quarterly reports and holidays – markets again expected to rally
These three conditions point to the market moving higher, but timing is everything. Wait for the pullback. This is key, and just after making new highs in the past week, expect a little retracement. Be ready to buy the equities when they move back up to break the current highs. September could very well be a down month, and that is a good thing because when the buying does resume, the entries will be that much sweeter.
I always have expectations. Pay attention to the ATR (Average True Range). In any time frame and any market, this will be the leading indicator to guide your profits, stops and epxectations. Watch for the “Yo-Yo Bars” on both the log and short sides for hints that the market is having a difficult time following through. These are some key basics I teach my Mentorship students as well as students of the Power Price Action DVD Course.
The chart below shows the price action of the weekly candles yo-yoing just prior to the drop. The term “Yo-Yo Bars” is one I’ve used for years to describe the repeated attempts and failures of a price bar to fully form on its way towards a goal. When multiple instances of this action occur, play close attention. The chart below depicts this exact scenario playing out. Now that the market is at new highs, or at least testing the current highs, a good sign to watch for would be these Yo-Yo Bars once again proving that price is trying and failing to move higher. Whether or not this will happen again I cannot say. However, once three, four or five candles begin to demonstrate the Yo-Yo Effect, you can expect a pullback to occur. These are visiual signs that I like to use as proof to show me where price may be headed. Regardless of the type of chart used (one minute, weekly, etc.), this action works the same way. If the pullback occurs (let’s wait for it to happen), the buying opportunity will present itself to close out the year. Stay tuned!