The 50-Day Indicator
The first five trading days of the New Year...
Let’s review the past week’s Dow Jones Industrial Average performance and see what’s in store for the rest of January.
According to the Stock Trader’s Almanac 2007 edition (which I highly recommend adding to your collection for purely statistical purposes), the Dow has been up ten out of the last 15 years on the first trading day of the new year… and down four out of the last seven.
Well, the former statistic stood. The Dow closed up 14.98 points.
Historically, the second trading day of the year has shown gains ten out of the last 13 years, and this held true as well. January 4 saw a gain of 7.53 points… measly, but still a gain.
Now, the first five trading days of the new year act as an “Early Warning” sign. Today, we’re in the fourth day of trading… and since the open of the market in 2007, the Dow is down about 77 points, courtesy of Friday’s 82-point drop.
According to Stock Trader’s Almanac:
“The last 35 up First Five Days were followed by full-year gains 30 times for an 85.7% accuracy ratio and a 137% average gain in all 35 years…. The 21 down First Five Days were followed by 11 up years and ten down making.”
Let’s take a look at the ranks by performance of this indicator.
The best First Five Day performance was in 1987. The first five days showed a gain of 6.2% and an annual gain of 2.0%.
The second best was in 1976: a five-day change of 4.9% and a total gain of 19.1% on the markets.
The third best was in 1999: a gain of 3.7% in the first five days of that year and a follow-on annual gain of 19.5%.
Hey! 2006 grabbed the fifth spot: a gain of 3.4% in the first five days and a total gain of 16.28%.
On the Dow, we’ve seen a loss of 0.65% since the closing of the market in 2006. To make this a five-day gain, the Dow will have to turn tail today and tomorrow, hitting Dow 12,463 to at least break even.
But historically, some early annual losses doesn’t seem to deter the Dow much either…
For example, a loss of 2.1% in 2005 during the first five days still spawned a market that ended the year with gains in pocket of 3.0%. And a loss of 4.6% in the beginning of 1991 translated into year-end gains of 26.3%.
If you ask me, this five-day indicator doesn’t really carry much weight. What I’m most interested in is the 50-day Moving Average… and whether it will hold at current levels.
Currently Relative Strength on the Dow Jones Industrial Average is down at a value of 51.13, and the Dow is above the 50-day Moving Average by 113 points.
The last time RSI was this low on this recent Dow rally was on Nov. 27, 2006: RSI was at 48.86 and the Dow was 150 points above its 50-day Moving Average.
From recent historical analysis of the Dow, if RSI breaks below 40, the 50-day Moving Average support fails.
If you are interested in any protective indicator to decide when to hedge yourself, look to the correlation of RSI and the 50-day Moving Average before any First Five Day Indicator.