Trending Stocks And The January Effect

By Cory Mitchell | December 16, 2012 AAA

The "January Effect" has become a catch-phrase for the overall generally good performance of stocks in the month of January. It is not a perfect seasonal indicator, and in many years throughout history the January effect has not resulted in early year stock price appreciation. Therefore, buying blindly is unlikely to bring fantastic returns, but buying stocks that are already strongly trending may give them even more of a boost should the January effect take hold in 2013.

SEE: January Effect Revives Battered Stocks

Visa Inc. (NYSE:V) has been in a very strong uptrend since June, defined by a rising trend channel. The stock recently bounced off the low of the channel signaling a continuation of the trend, and a rise to the upper channel band currently near $155. Technically, the stock looks strong regardless of whether the January effect occurs or not. If the January effect does kick in, through January the upper band rises to the $159 region - which is the target for the end of January if we have a strong start to the year. A drop to the lower channel band - currently $145 - indicates the trend is weakening.

SEE: Technical Analysis: Support And Resistance

V uptrend January effect

Discover Financial Services (NYSE:DFS) is currently testing its July-to-current trendline. If the pullback respects the $39 area, look for a pop higher in late December and in early January as the price moves toward the upper band of the trend channel. The upside target is $45 to $46 near the end of January if 2013 starts off on a bullish note. If the price drops below $39, it's a sign the trend is weakening. A drop below support at $38 indicates the trend has likely reversed.

DFS uptrend January effect

HDFC Bank (NYSE:HDB) has been on a tear since June when it traded at a low of $27.30. Currently, the stock is trading within a large trend channel and moving toward support. Support is at $40 to $39. If that area holds up to any selling pressure that might arise, look for the uptrend to continue. The target is the upper band of the channel, or the $45 to $46 region come late January. A drop below $39 warrants some caution but is not a sell signal. Meanwhile a drop below prior lows at $37 and $36 is a sign the trend has likely reversed, at least for the short-term.

SEE: Support & Resistance Basics

HDB uptrend January effect

Lions Gate Entertainment (NYSE:LGF) saw a dazzling rise in anticipation of the "Hunger Games" movie in early 2012, but then declined through April. The stock's current uptrend began in May and was contained within a well-defined, slightly narrowing trend channel. The stock just tested channel support at $15.30, and so far the region is holding. As long as the price stays above $15, look for it to rise toward the upper channel band at $18 to $18.50 come late January. A drop below $15 warrants caution, while a drop below the November low of $14.58 signals the uptrend is likely over for now.

LGF uptrend January effect

The Bottom Line
When buying strong stocks, it almost doesn't matter whether the January effect occurs or not. While a boost and overall lift in stock prices helps almost all bulls, trading strong stocks is one of the safer places to be even if January turns out to be dreary. The price is also close to support levels in these stocks, which means risk can be kept relatively small. Look for the trend channels to continue and hopefully you'll reap an early year profit, but if a break to the downside occurs, don't rely on the January effect to save you.

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.

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