Has January’s Volatility Woken Up The Bear? January Market Remarks – The U.S. Equity Edition

January’s Volatility Compensates for 2014’s Calmness

January ended with an intensity similar to the one witnessed at the end of December. During the last five trading days of December, Dow Jones Industrial Averages lost -1.3% and S&P 500 -1.4%. During the last five trading days of January, Dow lost an identical -1.3% and S&P 500 -1.7%.

In between these two month-ends too, the market was not calm like most of 2014. In 2014, S&P 500 did not have any down streak of more than three days. During Dec-end/Jan-begin period and again during mid-January, S&P 500 fell for five-consecutive days twice.

All indices were volatile. Let’s take the case of Dow, S&P 500 and other major U.S. indices didn’t fare any better, it started the year at 17823.07 and promptly made a low of 17262.37 in three trading days. It then climbed up for two days before topping out at 17916.04. In next six trading days, it again made a low 17243.55, though, on day three it tried to bounce up to the January’s high before tumbling down. From mid-January low, Dow rose up for four days and made a high of 17840.89 before closing out the month at the lows.

The last week of January was particularly volatile. The market-tremors from previous weeks’ events – SNB’s removal of euro peg, ECB’s expansion of QE and Greek election, just to name few – continued during the last week too. More shakes were by FOMC statement and other economic reports. The result was quite topsy-turvy for the market. Attached chart shows how the major indices performed at the end of January. The chart does not fully capture the turmoil on Wednesday and Friday. The market was initially up on both these days before tumbling at the session end. On Wednesday, market climbed up in the morning session and then continued to fall down. On Fri, market first fell down in the morning then tried to rise up before giving-up the ghost at the end.

Channel-Channeling Continues

Mid-week we remarked about the horizontal channels being traced by indices. Market action on Thursday gave rise to the hope that the market will challenge the upper-limits of the channels and then perhaps surpass it. Alas, that is not to be. Even Amazon’s great fourth-quarter earnings announcement and the resultant gushing of analysts was not enough to maintain the rally on Friday. Crude oil had been falling since last summer and so far the theme had been that whenever it starts to rise, market also rises. Even that correlation didn’t work on Friday. Crude advanced by 8% but market fell.

S&P 500 Weekly

S&P 500 – 30-Minute

On 30-minute chart, the S&P 500 has come back to the lower limit. In the process it made a small double-top and broke below its intermediate low. The measured target for the double-top pattern is around 1975, near the December low of 1972, which will also be within the support zone of the channel. A break below that opens up the path to the next support level at the October low of 1820, which is 13% below the high 2093.55 made on December 29, 2014.

Other indices are also in various stages within a trading range that has been forming since the start of January. Dow Jones Industrial Averages is in most danger of completing the break-down below the channel. It is currently trading under the lower-limit and unless it again travels back up the support it would reach the measured target of the channel-pattern, which is around 16600, -8% below the high of 18103. Dow’s next support is October low of 15855, which is -12% below the high.

DJIA 30-minute

NASDAQ 30-minute

Russell 2000 30-minute

NASDAQ Composite is also moving towards the lower limit, though unlike other indices it has not made a lower low since mid-week. The lower-bound of the channel is still a support level for it. The biggest reversal on Friday made by Russell 2000, though, like NASDAQ, it too did not reach the lower-bound of the channel.

Are Weeklies Showing Ominous Signs

On weekly timeframe, Russell 2000 is forming a horizontal channel since the beginning of 2014. Three times it tried to break out of the high level around 1210 – in March 2014, June 2014 and December 2014. Unless it convincingly breaks above the high, the pattern may become a topping one.

Russell 2000 Weekly

NASDAQ – Weekly Close

DJIA – Weekly Close

NASDAQ Composite is slightly in a better situation. On weekly timeframe, its horizontal channel at the top is of shorter duration – since November 2014 – and of smaller magnitude. So far it has also stayed above the previous high made in September 2014 on weekly close basis. That broken resistance (September high) is acting as a support.

Dow Jones Industrial Averages pattern on weekly timeframe is similar to that of S&P 500 and NASDAQ Composite. Though, unlike NASDAQ and like S&P 500, it has breached the previous high made in September 2014 on weekly close basis.

The bottom line, that we at Market Remarks believe, is that the current doldrums in the market are far from over and they will last for the next few days and weeks. Market is awaiting more information about macro-economics, corporate earnings and geopolitical events including the Greek crisis and Middle-East crisis. How the policy makers and corporate leaders will respond to them will hold the keys to market’s next substantial move. If during this time the emerging bearish patterns converge then the retracement will go further otherwise the trading range will continue. We will write more about them in the coming days.