The Leaves Fall In October

October has always been a very interesting month to me as far as the markets are concerned.  The leaves change color and then just drop to the ground like a dead weight.  Strange isn’t it how the markets sometimes seem to do the same during this famous month?

But we are already 2 weeks into October and we already got through September as being one of the best in 70+ years.  It would seem reasonable to a common man to expect at least some profit taking during the last two weeks of October to keep the ‘down October’ tradition alive?   Or are we to expect October to be another blockbuster month like September was ?  It seems too good to be true to expect the market to deliver such a record September and then deliver the same for October.  Two months traditionally seen as ‘surprise downside’ months.

Since my BOT Short Signal on October 14, 2010 the sp500 churned a bit sideways for a slightly positive close.  But the banks continued to show very alarming weakness to me in terms of their downside price moves and more importantly their downside volume.  In contrast the tech sector blasted higher again as we await AAPL earnings next week. 

The dilemma I am having right now is whether or not tech will be able to pull the market up for the rest of October or whether the banks will drag everything else down and only allow very limited market upside.  Maybe I should rephrase that question and say whether or not AAPL, NFLX, AMZN and a few other big tech names will be able to keep the rest of the market afloat.

I don’t quite have a clear answer yet.  But here is what I can say up to this point:

  • The high volume drop in the financials right off the very long swing trading range highs is not in my opinion ending action.  To me it is more likely the start of a possible impulse leg down that could potentially come out of nowhere and be quite severe.
  • I looked at all 30 DJIA stock price charts and can say with reasonable confidence that a good majority of them are in a very ripe stance for a downward correction.  Some of them have very dangerous looking bearish divergences between MACD and price.  Others have rising wedge formations with apex’s formed near previous highs.  These types of setups have at least the potential to lead to sharp moves down that come out of nowhere.
  • Some might say that the high volume drop in the financials is ending action, or climax selling volume.  I completely disagree with this point.  GE on March 6, 2009 had all time record climax selling volume after an extended downtrend.  To me that was ending action.  But a very high volume drop off of the TOP of a very LONG swing trading range is not ending action.  It is beginning action to me.  It is also beginning action when one considers it began with a big gap down ( or opening window as the Japanese like to refer to it ).
  • I need to be very careful about becoming too bearish too quickly.  If close above 1184.38 on the sp500 next week then I am going to have to switch to BOT Neutral. 
  • The UUP US Dollar Index ETF has shown to me this past Friday that it wants to strongly REJECT the recent supporting range and blast higher.  Very notably it did so on record volume.  It looks like a very key reversal to me.  I also understand that there are only 3% US dollar bulls, a very crowded sentiment.  So the dynamic that could unfold is a very sharp upward spike in US Dollar, which leads to major body blows to the gold price and also the sp500 as well ( and would maybe break the sp500 below its uptrendline September support).
  • The WEEKLY candlestick on the BKX banking index and the XLF does not look pretty.  Looks like a shooting star reversal and could imply the last two weeks of October are either down or HARD DOWN.

sp50020101016

The chart above shows that the sp500 is currently showing a Class C (according to Alexander Elder) bearish divergence between MACD histogram and sp500 price.  This is the most bearish type of divergence and can lead to very sharp vertical drops down.  The rising wedge seems consistent with the potential class C bearish divergence signal.  Bearish divergences describe a situation where price advances during the last portion on ‘momentum and fumes’ only.  According to Elder they are the strongest potential signal in technical analysis.

But at the same time that the potential bearishness exists, I must concede that so far the sp500 has not broken below up trendline support which still puts the benefit of the doubt in the bulls court.  At extreme bullish levels they tend to push the market higher and higher seemingly forever.  This is what happened in April 2010.  Whether or not we squeeze higher out of this wedge and blast up to 1200 is unknown to me now.

I would think that with the US Dollar blasting higher it would seal any upside in the market next week, but sometimes the market relationships and signals are delayed for a bit.

I went long the VXX November 16 calls again this past Friday but I am bit disgusted with the way the Vix closed negative at the end of the day.  It seems as though the VXX has an extraordinarily good risk reward ratio now toward upside action, but I am hoping the sp500 does not exceed the highs of 3 days ago. It would seem AAPL earnings are going to blast the markets up another 200 points next week.  But maybe the AAPL price is already discounting the best of all scenarios and will decline on the earnings results ?

I have to say that what has really changed my tone in the last few days is the break down in the banks and banking indexes.  When you see gargantuan volume like that coming in on downside action right from the top of a VERY long swing trading range, it basically is saying to me that some very big money has decided that they are sick and tired of the swing trading range, and they want out and they want out NOW.  Its like they tried and tried and tried to bust the banking index north but it just did not work.  The big money always knows something ahead of everyone else and that is what it looked like in the financial indices.

But still the issue remains of whether the sp500 can just shrug off that weakness and continue in a nirvana state for the rest of October.  To me the odds are starting to tip more towards down for rest of October.  September was a blockbuster, the first two weeks of October have the appearance of a repeat, BUT remember the leaves do still fall in October.

P.S. I case you are interested. Check these out: Mahendra Prophecy and the latest Bill Mclaren:

One of the workouts of a 90 cycle is to start a congestion now (at 45) and resume the uptrend on 60 days from low or around Nov 1st (+-2 days) and would allow for a 30 day run to 90 days around Dec 1st.*

Posted in Index Trading, Market Timing, Online Trading, SP500, Technical Analysis
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5 comments on “The Leaves Fall In October
  1. Geoff says:

    Tom

    thanks for what reads as very objective thoughts on the market. the two links were interesting. Mahendra was obviously quite wrong for the period ended last week. An indicator i watch seems exceptionally overbought and threatens / seems likely to make a new record string of 10 ma positive days. i think a sudden swoon is possible but i do not sense it.

    thanks your work

  2. Geoff says:

    at http://www.zerohedge.com today there is the following observation:

    Given the current systemic distortions and extreme irrationality in the equity markets, a severe and violent sell-off in stocks would not be a shock, and it could come with minimal, if any, warning. It also might be coincident with a U.S. dollar-selling panic. – John Williams

    i find this scenario almost unfathomable since you would think there would be some type of warning action, but maybe there is, we will just not be accustomed to the type of action.? !

  3. Tom says:

    I don’t really sense a sudden swoon either. But that is usually how things tend to start, completely out of nowhere. That 10 MA stat is interesting. Many indicators are over extended to the upside, which is another reason for at least some type of pull back. Good catch with that 10 ma.

    The dollar looks more setup for a huge short covering upward spike… so it seems the panic could happen in equity market while dollar shoots up.

  4. JR says:

    As a retired CEO of a bank, I find the action in the bank stocks very interesting. Especially, since a lot of fundamentalist and technical guys are putting a lot of stock in their movement.
    After BofA announced a moratorium on foreclosures, the market seemed to take that as some form of Titanic bad news.
    Actually, it was just a way for the Banks to avoid taking more loses on their books. Ordinarily, the regulators require banks to recognize their loss as soon as possible. Liquidate REO’s at the market, whatever the market may be.
    In other words they are pressed to do things that may not be in their or the economies best interest.
    As far as REO’s are concerned it is obvious that the market is under a lot of strain. Pushing prices lower and lower.
    This is not good for banks. Ergo a breather is needed. Ergo a red herring.
    This document thing is a total red herring. Does anyone in their right mind think that any court is going to be saying to a borrower of hundreds of thousand of dollars.
    Oh, the bank seems to have misplaced your documentation therefore you owe nothing.
    As a retired lawyer,I went into banking after practicing law, I should explain courts not only interpret law, but are also are required to base their decisions on equity. That is what is fair. It would be a perversion of equity to say to a home owner, Oh lets just wipe out your debt on your house. Sure you borrowed hundreds of thousands of dollars to buy the house, but the guy who lent you the money can’t find all the assignments of your deed of trust. So lets just let the lender eat the loss.
    Come on, get real. In other words you get hundreds of thousands of dollars for nothing.
    I think Willie Sutton went to jail for that.
    That is plain and simple bank robbery. And that will not happen!!
    Especially understanding Bank legislative clout, that is IMPOSSIBLE.
    So why the panic in bank stocks, because people and fund managers don’t think!
    Bank stocks, that is banks, are in no worse situation today, that they were a month ago.
    But someone, probably the oligarchy, is going to make a fortune buying up all this cheap bank stock!
    And then of course the mood regarding bank stocks will change.
    Note: there is a lot of rhetoric about how awful the banks are. This is a political red herring. Running for office,slam the greedy banks.
    Incidentally, no one thought the banks were ogres when they were borrowing hundred of thousands of dollars on shacks that use to sell for twenty thousand and suddenly were selling for 600 thousand.
    And as a banker I have seen this situation before, such as in the 80’s, when I would counsel borrowers that the present prices were inflated and would not hold. And of course the borrowers would reply, oh real estate prices never go down. Yeah.
    And now the same misinformed people think the banks stocks are worthless.
    Tell that to the Rothschild.

  5. Geoff says:

    JR – – let’s hope that the rule of law prevails but as a former GM bondholder (8.75% 2033) who saw this Administration largely confiscate a very large part of the REMAINING value of GM bonds from public bondholders and turn over a huge portion of that remaining value to the UAW – – -fairness and perhaps the rule of law are not a foregone conclusion in these very unusual times.

    you may be right, but when BAC got as low as $2 or so back in early 2009 / late 2008, it is not out of realm of possibility that BAC can not go a lot lower from the $12 or $13 that it now is. . . . . and those could be huge percentages.

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