Since the October 4 rally the major indices have been stuck in a quagmire of tight, range-bound trading. The S&P and Dow have struggled to break through what seems to be an area of strong resistance but have failed with each attempt. Typically, this type of low volatility trading leads to a sharp move outside of the range. Given the short-term bearish indicators that are piling up as well as the bearish seasonality that the market is entering I can’t help to lean towards the bearish camp, at least over the short-term. However, as I have stated numerous times keep a close eye on how the S&P reacts to the 1340 area. If the index tumbles through this area without pause we could see a nice move to the downside. However, if the market begins to consolidate around this area we could get a bounce higher. Keep a close eye on this area!
I would like to reiterate the statistics I mentioned yesterday as I think they are quite interesting and you should always be aware of the upcoming historical trends. I apologize to those of you who have already read through this but I do think it is important for those of you who have not had a chance to look at seasonal trends ahead.
Overall, October has been positive, but most of those gains (94% to be exact) have come during the first/last three days of the month. The middle of the month has been weaker than normal. Historically, 9 out of the next 13 trading days have shown below average returns. The question is will the seasonal bears come out to play this time around. The market is still “overbought” to “very overbought” and our proprietary indicators are still leaning towards a short-term sell off. If the market does sell-off watch the 1340 area as this could act as a decent area of support for the S&P.
Another interesting (and not often mentioned) statistic that I came across was that when the market had a strong September and October during the mid-term elections (4 year cycle) every single time the market experienced a dramatic sell-off during the middle of November. The scary thing was that the sell-off averaged 5% to 10%. This is certainly something that we will be watching as we move closer to the mid-term elections.
As I always say, seasonality, in most cases, should never be the sole reason to place a trade, but it does pay to keep a close eye on seasonal tendencies to further assist you in your trading.
RSI (5) Wilder for October 10, 2006
- SPY - 79.5 (overbought)
- DIA - 80.9 (very overbought)
- IWM - 71.0 (overbought)
- QQQQ - 75.8 (overbought)
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Andrew Crowder, Chief Investment Strategist