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The January Effect On The Dow Jones Industrial Average

Happy New Year everyone!!! The Santa Clause Rally gave the Dow Jones Industrial Average (^DJI) a decent rise for the final month of 2010. From 11,007.30 on December 1st, the ^DJI ended the month up by 570.20 points to 11,577.50. Moreover, the “January Effect” is on the way and could further boost the Dow’s ascend. The “January Effect” phenomenon is when the stock markets rise on the first week of January as many investors choose to sell their stocks right before the end of the year to be able to claim a capital loss for tax purposes. Then when the tax calendar gets refreshed for the new year, investors start buying stocks once again. This has been proven by history however as more people expect this and try to ride, it usually losses effect. Let’s see if this will take place on the following days.

The Dow Jones Industrial Average has been on an uptrend since March of 2009 after the financial crisis. Zooming in closer, there is a steeper uptrend in the 4-month time frame. From short to long term, the ^DJI is in bullish mode as long as the trend remains intact. In my opinion, following the 4-month uptrend in accordance with the possible “January Effect” phenomenon, the Dow Jones Industrial Average could continue to rise in the coming days as the MACD is moving above 0 as well. In case it does, the 2-year high at 11,655 could be hit. If that gets broken another 400-500 points could be added to this index until it encounters some selling pressure at the 11,933.50-12,000.00 resistance. If that resistance area gets cleared out, the next resistance could be around the 13,000.00 level. On the downside, the immediate support could be the 4-month uptrend. Once that breaks, the next support could be the 22-month uptrend.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.