January 8, 2012

Factor Special Update The January Forex Effect

I have covered the January Forex Effect several times in recent weeks, but this phenomenon can be such a powerful trading edge that it demands emphasis whenever possible. The January Forex Effect is the historical tendency for the U.S. Dollar to establish at least a half-year high or low during January a high or low that often becomes the absolute annual high or low. For example, the annual high or low has been made in USDCHF during the first two weeks of January in more than 50% of trading years in the modern era (since the IMM came on board). From a trading perspective this is a vitally important phenomenon because it can define risk. It looks to me as if we already have a January high in EURUSD, a January low in the U.S. Dollar Index, a January low in USDCAD, and a January high GBPUSD. Of course it is possible that these highs or lows become modified before months end. To the right is a table of January highs and lows dating back to the early 1970s.

The January Effect has everything to do with technical analysis. Roy Longstreet was a technical analyst and trader in the early days of commodity trading. He refined a quasi-technical approach called the Analogue Year Concept. This approach attempts to find seasonal repetition of price behavior. The January Forex Effect analysis herein focuses entirely on past price behavior as an indicator of price expectation. This, in essence, is technical analysis in a very pure form. The chart on the top of the next page displays the January effect in EURUSD. I wish I was short the EURUSD. I thought the pair had more rallying power, but the Jan. 4 high may be all we get.

The January Effect in the forex markets is real and it is substantial. The table to the right shows the % price change produced from the January high or low in the EURUSD. Of course, it is wishful thinking to believe a trader will catch the full price swing implied. Nevertheless, an average price change of 17% is significant. If the Jan. 4 high of 1.3073 holds in the EURUSD, this historical tendency suggests a decline to 1.0851. Of course, the January Effect coin has two sides. There is conventional wisdom for the EURUSD to weaken. The least expected event by the market would be for a January low to occur. Thus, traders need to remain sharp. Markets have a way of serving up surprises.

Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

January Forex Effect EURUSD Subsequent High/Low Jan. High/Low Price Month 1.2874 1.4580 1.4363 1.4367 1.2876 1.1799 1.3582 1.2898 1.0338 0.8568 0.9590 1.0415 1.1869 1.2733 1.3669 1.2500 1.4940 May 1.1877 Jun 1.2487 Mar 1.6020 Apr 1.4967 Nov 1.3369 Dec 1.1637 Nov 1.1759 Apr 1.2470 Dec 1.0441 Dec 0.8350 Jul 0.8230 Oct 0.9994 Dec Jan effect did not occur 1.0341 Aug 1.2424 Dec 1.4530 Mar Average change

% change 16.0% 22.8% 15.0% 11.5% 16.2% 13.3% 16.7% 9.7% 20.6% 21.9% 14.9% 26.5% 18.8% 23.1% 10.0% 16.2% 17.1%

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