Tuesday, January 3, 2012
The January effect
A large gap and a move up on the first trading day of the year is generally considered a good omen and a predictor of a bull move for the next few months. When the market closes near its low, the strength of this assumption is weakened.
On many years, this is an expected gap open and some traders will take a long position on the last trading day of the prior year and exit on the open for a very good profit. This is still gambling however, since a gap down can wipe you out.
Trading based on a large overnight move is speculation and should be done with caution. A small position may be taken using call options, but a larger position required a spread, butterfly or other limited risk option strategy.
Earnings, interest rate changes, government announcements, etc can also be traded this way.
Correction: The original chart showed a buy above b6 on the fL2. The actual buy was at around the same price but above the first bar of the 3m chart as shown below.