The "January effect" has had little impact on the US equity markets this year. It is becoming more and more obvious that the typical January effect is now coming in two waves. The first wave comes from year end bonuses, automatic portfolio purchases and speculators trying to get a jump on the year's index performance. The second wave is based on conscious thought rather than habit or speculation. Based on the commercial trader behavior in the Nasdaq 100 futures it appears that we may be nearing a rational buying opportunity as you can see on the chart below.
Our methodology is simple which also contributes to its robustness. The discretionary program uses the same inputs and parameters across all liquid domestic futures markets. The current situation is a classic example of these indicators working hand in hand to seek out an undervalued market in a temporarily oversold condition that is supported by the commercial traders.
The Nasdaq 100 futures were down around 4.5% at their lows on Friday, January 16th. The sell-off that preceded Friday's reversal was deep enough to push our short-term market momentum indicator into oversold territory. Friday's reversal was strong enough to bring the indicator back above our oversold threshold. When we combine the technically quantifiable market action with the bullish outlook of the collective commercial trader population within the Nasdaq 100 futures complex it creates both the buy signal and the swing low that we will use as our stop loss point.
Therefore, Fridays low of 2041.5 in the March contract will serve as our protective stop point and we will use this morning's sell-off to improve our projected risk to reward ratio.
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