Good day! The S&P 500 and Nasdaq had their largest one-day drops since last August and the Dow felt its largest one-day loss since mid-November on Friday.
There were a number of factors that contributed to the market's downfall on the day. The first, and the ones you've likely heard the most about prior to Friday, are the two major levels of resistance that the market has been flirting with in the Dow and S&P 500. The Dow Jones Ind. Ave. has been testing the 12,000 level, while the S&P 500 has pushed up against the 1,300 level. Both are significant price points in the minds of market participants and have been widely followed as major resistance points after nearly 9 weeks of gains in the market. These price levels, combined with one of the longest weekly rallies in years, were enough to start to put the bulls on edge.
Dow Jones Industrial Average (Figure 1)
As I mentioned earlier this month, January is also a common month for the market to kick off a correction on the larger time frames. Sometimes it only lasts a few months. Sometimes it's substantially longer. The slowing momentum over the course of the week as January wound down also made it easier for the market to not only correct, but for that correction to take hold quickly in the form of a selloff and not just another trading range.
Next were earnings. The market has been hit with some fairly mixed earning so far this season, but those heading into Friday were particularly disappointing. Although Amazon.com (AMZN) posted stronger-than-expected quarterly results, it's forecast did not follow suit and the subsequent selloff of 7.22% weighed heavily on the Nasdaq. Amazon has become quite extended on the weekly charts over the past 6 months, so we'll likely see it continue to struggle this year as it takes time to catch its breath.
Ford (F) fared even worse. It's results were well below analyst expectations and it posted a loss of 13.41% for the session. It will have a difficult time attempting to recover from such a loss and could take weeks or even longer to do so.
Although the resistance levels, the trend extension, and even the disappointing earnings were strong factors in favor of a correction on the daily charts at least, Friday's primary catalyst came from abroad. A number of nations in the Arab World have experienced extreme political unrest in recent years, and particularly over the past several weeks, but the most recent was ignited in Egypt as men took to the streets in protest of the government and direction of the country under President Mubarak's leadership.
S&P 500 (Figure 2)
If there is one thing the market doesn't like, it's uncertainty, and on Friday we saw a rapid flight to what are traditionally viewed as "safe havens". Gold shot higher, at least stalling its larger weekly correction and oil prices also soared as concern increased regarding supply lines in the Middle East, such as through the Suez Canal. Approximately a million barrels of oil per day pass through that gateway from the Persian Gulf to the Mediterranean. Gold rose $22.30 an ounce to settle at $1,340.70 on Friday, while crude oil settle higher by $3.70 a barrel at $89.34.