E-Mini S&P Is Going Down Before Up $ES_F

The equity market generates an endless series of folk myths – snippets of conventional wisdom that supposedly reveal how traders think and thus how the markets will react.

You know: “sell in May and go away.” “Always buy new highs.” “Bulls make money, bears make money, pigs get slaughtered.” And many, many more.

The current folk myth concerns the “January effect,” the prediction that if the first week in the New Year is green the rest of the year will be green too.

Maybe, maybe not. But this year there was a strong attempt to make sure the first week closed positive … and it almost failed. The extraordinary effort required to eke out a very modest advance on Friday afternoon testifies not to the market’s strength, but to its weakness.

So much so that we are now calling for a decline this month, especially in the segment that interests us, the S&P500 mini-futures, current symbol ESH4.
The rest of the year may be green; but we see a real possibility the ESH4 may revisit the December lows around 1774.00 before January is out.
This should not be very surprising. After an almost unprecedented rally in December – up about 90 points in the last two weeks of the year – a retracement was virtually baked in the cake. And Friday afternoon’s push to close positive was a clear attempt to manipulate investor sentiment. We started calling our members short around 1837.00.
By Monday the reversal was obvious: it was the worst single day for U.S. equity indices since August, and all are now negative for the year. The price action (see the chart) was extremely bearish.

This week we may see consolidation, with 1826.50 and 1833.00 as major resistance levels. But the support has fallen to 1802.00 and 1795.00. If we see a bounce in the early session Tuesday we will be looking for short entries.

Note that our longer-term outlook is still bullish. A healthy correction in a requirement for another leg up in the bull market. But for the short term the smart money – and ours – will be looking for ways to get short.