How to Trade the Friday-Monday Warning

This post How to Trade the Friday-Monday Warning appeared first on Daily Reckoning.

Warning: Keep your eye on the Dow today!

If it ends up in the red at the end of trading, it might be time to pick up your bear suit from the dry cleaner…

Today, I’m going to tell you about something called the Friday-Monday Warning and how you can use it to gauge the market’s health. You’ll also see what it’s telling us about stock market right now… and if it might be time to start reaching for the Maalox.

The stock market’s been flashing warning signs lately. This down, that down, casualties everywhere. I told you late last week that more than 20% of the S&P 500 is actually in a bear market right now—despite the fact that the major averages are just a stone’s throw from their highs.

That’s just not normal, my friend.

Now we’re seeing more bearish data roll in —and it has to do with how stocks trade at the very end and beginning of the week.

This simple indicator, as explained by Stock Trader’s Almanac, looks at the performance of the Dow Jones Industrial Average on Fridays and Mondays— it’s that simple.  And as you’ve probably already guessed, a down Friday followed by a down Monday is bearish.

So why are down Fridays followed by down Mondays so bearish?

“Fridays and Mondays are the most important days of the week,” Stock Trader’s Almanac explains. “Friday is the day for squaring positions—trimming longs or covering shorts before taking off for the weekend. Traders want to limit their exposure (particularly to stocks that are not acting well) since there could be unfavorable developments before trading resumes two or more days later.”

And over the past 20 years, a steady influx of down Fridays followed by down Mondays has consistently produced some ugly results.

Take a look:

Like I said, ugly. And guess what? The Dow has posted two down Friday- Monday sessions in a row. Last week’s was the eighth Friday-Monday warning the Dow has registered so far this year.

And the Dow finished in the red this past Friday, as you probably know. That means if the big board closes lower today, we’ll have our third Friday-Monday warning in a row—and the ninth of the year. The ninth! And the year still has almost five months to go.

So these final, lazy days of summer are getting very interesting. Pay close attention to the stock market today. If the major averages finish lower we might want to start preparing for rough weather.

2015 hasn’t been an easy run for most traders, that’s for sure. But if we remain objective and jump when the market says, we’ll have the opportunity to avoid most of any oncoming carnage. And we’ll be able to book some tidy gains when the opportunities present themselves. But this isn’t the time for complacency.

So stay tuned…

Greg Guenthner
for The Daily Reckoning

P.S. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.

The post How to Trade the Friday-Monday Warning appeared first on Daily Reckoning.