Troubling start to New Year
The rule of thumb wisdom for the “January Effect” goes something like this: the stock market tends to rally the first week of the year, with small-caps outperforming large-caps as investors adjust to tax-related selling from the end of the previous year. Most important, there is a follow up theory espoused by many that “as goes January, so goes the year.”
Most market “truisms” are rooted in solid theory. In fact, most of these broad theories usually worked like a charm for a long period of time, hence they grew into fabled status. In the case of the theory that “as goes January, so goes the year” -- well, that just hasn’t been the case for the Russell 2000 (NYSE:IWM). Over the past 15 years, that premise only worked 9 of 15 times, including a run of six straight from 1997-2002. Interestingly, that concept has alternated right and wrong years now for the last seven seasons of trading! If the alternating trend holds up, then small-caps will NOT follow the January trend this time around. Given the ugly start we got off to during the first full week of trading in 2009, maybe that alternating trend is a good thing. As it turned out, this week’s action saw the largest one-week decline in the broad market over the previous seven weeks and the Russell generated its first 4% daily slide of the year on Friday. In 2008, the market didn’t undergo a 4% one-day drop until September 15, when the collapse kicked into gear: this year we got a 4.1% and 3.4% daily drop during the first full week of trading.
If we’re going to get immersed in January patterns, I thought it might be best to study previous recession years. Back in January 2002, the market was coming off a recession that ended the previous November, but the market was off 1% in January (basis the Dow) and ended up sinking 16.8% for the year. Before that, back in January 1991, the market was still in a recession that didn’t end until March 1991. But then, the market rallied 3.9% in January and eventually gained 20% for the year. Maybe the lesson here is that a stock market rally in a recession in January suggests that the proverbial light is visible at the end of the tunnel. It has been popular for market watchers to say that the worst of the news is already priced into the market via last year’s 34% collapse, and there is some historical precedence to back that up. In the above January recession comparisons, I suppose it would be a positive indicator for the market to generate a rally the next three weeks of trading before month’s end.
That said, Friday’s market reaction to the big employment report was not a good sign. Clearly investors were unwilling to shrug off the news this time around. For now, score one point for the 2002 down-year recession pattern.
OK, now that we’re all a little battle-scarred and weary from the first full week of trading in 2009, what’s the real skinny on this past week’s chart action? The market is still basically waffling in a sideways consolidation range, and still holds a minor upside bias on intermediate charts and a strong bearish slant on long-term studies. The powerful Friday breach of 491 was a troubling development and the dip through minor short-term support at 484 didn’t help things either. Sustained action below 491 will open the door to test 473 and from there it’s a quick slide to 450-442 support. On weekly charts there is a little bearish “cloud cover” on candlestick versions and a clear rejection of the thrust above the figure line at 500. If we can mount a recovery rally this week back above then it will clear the way to test 514.50, 525 and perhaps within a couple of weeks the big point at 550. Given last week’s failure, the most likely course of action this week would be a range between 495 and 455.
The table below contains support and resistance points for the Russell 2000 to keep in mind heading into this week’s trading. For long-term traders, some of these key levels may remain in place for weeks...even months at a time. Those with a short-term horizon will lean toward levels that are more immediately in play. As time passes, we will build upon this table with levels that come into focus as important testing zones for trend analysis, and to act as road mark indicators for key reversal patterns.
From a trading perspective, I always keep a printout handy each day of my key support and resistance points for any stock or market I’m trading. It helps remind me of key areas to watch for signs of trend exhaustion, and also for potential entry/exit points for trades.
TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000
- 890.16 upward channel resistance on monthly charts off 5-year run;
also fits with potential upside breakout of congestion zone
- 860.00 projected “figure” resistance off 15-handle testing zones on the ’06 rally
- 856.48 record intraday high set July 13, 2007
- 855.77 July 13, 2007 close; record high daily and weekly close
- 852.06 Oct. 11, 2007 high; bearish reversal peak on daily charts
- 830.01 previous high from the February 2007 peak; key swing line of note
- 815.00 key swing line
- 801.00 congestion resistance zone from November-December 2006
- 775.03 61.8% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse
- 764.38 new move high set August 15, 2008; approximate double top with June ‘08
- 762.89 previous move high set June 5, 2008
- 760.06 March correction low; key approximate double bottom formation support;
Near 50% Fibonacci of July ’06-’07 bull run; violated in November ’07;
Key swingline to watch
- 743.49 previous Aug. ‘07 collapse low; short-term support violated, now resistance;
Also near chart gap left by Jan. 2008 employment report news
- 726.19 previous double top in June/July 2008
- 720.50 swing point
- 700.00 “figure” swing line; no monthly close below here since Dec ’05 until Feb ‘08
- 685.00 20% decline off 2007 record highs; breached Jan. 2008, July 2008, Sept. ‘08
- 680.94 mild reversal low on daily charts Jan. 28; near 50% of the March ’08 bounce
- 668.58 July 2006 low; important bottom for summer correction; now resistance
- 660.00 short-term downside target on wedge breakout; now swing line
- 650.00 previous bear market move low set Jan. 22, 2008, former critical support zone
- 647.37 July 15 2008 low; approximate triple bottom with Jan ’08; Mar ’08; snapped
October 2008
- 643.28 previous move low set Mar. 10, 2008; now resistance
- 614.76 October 2005 bottom; now resistance on a bounce
- 606.42 April 2004 highs; now resistance
- 577.00 consolidation zone when market was bottoming in spring 2005
- 570.06 absolute low on spring 2005 bottom; now resistance
- 551.00 short-term resistance from daily charts in October 2008; early Nov. peak
- 539.91 20-week moving average; nice trend support for bull run; smashed on
July/August 2007 collapse
- 514.50 swing line
- 500.00 logical big “figure” swingline
- 491.15 swingline of note; former resistance bounce peak
- 482.62 20-day moving average
> 481.30 Jan. 9 close
- 473.14 late November congestion range peak
- 442.10 previous bear market low set Oct. 28, 2008; bullish reversal on daily charts
- 433.36 new bear market bottom set Nov. 13; bullish reversal on daily charts
- 430.00 figure point near 50% “recession target” pullback
- 416.13 recent congestion zone trough
- 406.54 Nov. 21 close; lowest weekly close since April 2003
- 400.00 figure support matches with trading zone from 2002-2003
- 385.31 lowest daily close for the 2008 collapse
- 371.30 Nov. 21 bear market bottom; bullish reversal on daily charts
- 354.00 approximate value zone when market was bottoming in 2002
- 324.90 October 2002 bear market low
In addition to the print out of support and resistance points to watch, I also like to keep in mind where sudden volatility can spring into the trading mix from the typical release of economic data and Federal Reserve activity.
The economic calendar is jam-packed this week, on the heels of Friday’s big jobs report. The likely highlight will be Wednesday’s retail sales report, but there is a dizzying array of numbers coming out Thursday morning as well, including inflation data and weekly claims. The Beige Book report Wednesday afternoon could stir up a hornets nest, and a Tuesday morning appearance by Federal Reserve Chairman Ben Bernanke in London might have the market buzzing. Several Fed officials will present their economic outlooks next week, so the market should get a solid feel (if that is possible with Fed-speak) for how the policy bias shapes up.
The table below highlights calendar event risk for the coming week, with the emphasis on various economic reports. Our table below has a special “Risk Factor” designation, which is simply my assignment of risk to that event, ranging from 0 to 5, with 5 marking the highest risk for volatile market swings.
CALENDAR EVENT RISK ASSESSMENT
RISK
FACTOR REPORT/ITEM (all times Eastern) Consensus
2 Fed’s Lockhart “econ outlook” (Mon., 12:40 p.m.)
4? Fed Chair Bernanke “crisis, response” (Tues., 8:00 a.m.)
1 International Trade (Tues., 8:30 a.m.) -$51.0 bln
0 Treasury Budget (Tues., 2:00 p.m.) -$50.0 bln
2 Fed’s Plosser “econ outlook” (Wed., 8:30 a.m.)
5 Retail Sales (Wed., 8:30 a.m.) -1.2%
0 Import Prices (Wed., 8:30 a.m.) -5.2%
2 Business Inventories (Wed., 10:00 a.m.) -0.5%
1 Fed’s Stern “policy prospects” (Wed., 1:00 p.m.)
3 Beige Book (Wed., 2:00 p.m.)
3 PPI (Thurs., 8:30 a.m.) -2.0%
2 NY Manufacturing Survey (Thurs., 8:30 a.m.) -25.0%
4 Weekly Claims (Thurs., 8:30 a.m.) 520,000
2 Philly Fed Survey (Thurs., 10:00 a.m.) -35.0%
0 Fed’s Lockhart “econ outlook” (Thurs., 1:40 p.m.)
1 Fed’s Evans “econ outlook” (Thurs., 1:40 p.m.)
1 Fed’s Yellen “econ outlook” (Thurs., 2:00 p.m.)
3 CPI (Fri., 8:30 a.m.) -0.9%
2 Industrial Production (Fri., 9:15 a.m.) -0.9%
2 Michigan Sentiment (Fri., 10:00 a.m.) 59.0%
1 Fed’s Lacker “econ outlook” (Fri., 12:15 p.m.)
