The action in the stock market is getting more volatile, at least in realized terms (implied volatility has not kept pace). The bottom line is that resistance at 2800-2820 has been reinforced, and similarly, support at 2580-2620 has been reinforced as well. The $SPX chart is bearish, in our opinion, as long as $SPX remains below 2820.
There have been a number of positive developments in the past week or so: buy signals, oversold conditions producing rallies, and so forth. But the primary concern is how the $SPX chart looks, and it continues to look bearish. It is still in a downtrend, with heavy resistance at 2820. If that resistance were overcome, then our stance would change to a more positive one.
The $SPX chart remains bearish. This week's action did not decline far enough to be a test of the October lows. The support area at 2580-2600 remains the bulls' best hope at the moment. If that gives way, then 2530 is the next stop. A violation of that area would be very negative.
If you enjoy seasonal trading patterns, they abound from the end of October (the “October Seasonal,” which was strong this year), through the beginning of the new year (the “Santa Claus” rally). Over the years, we have combined three different late-year seasonal patterns into one trade.
The three patterns are as follows:
Several times, we have mentioned the fact that in a bear market, there is usually selling in October, followed by a strong October Seasonal rally, and then a failure of that rally in early November. If it is truly a bear market, new lows are made in November or early December.
A break of support at 2580-2600 would likely augur for a retest of the February lows at 2530. A failure there, and the real bear market should unfold -- but perhaps not until early next year (December is normally a bullish month, even in bear markets).
Conversely, if $SPX were to climb above 2820, it would be a very bullish sign.
This week saw the ninth biggest one-day point gain in the $SPX in history, as it rose 58.44 points on Wednesday. With that, $SPX had rallied over 200 points in a straight up manner, since the lows just six trading days prior (a time period which included our October Seasonal rally). That is the power of an oversold rally. It may surprise you to know that all of 10 largest point moves in history (by $SPX) have been completely reversed within a matter of days or a few weeks.
On Wednesday, $SPX made a huge move to the upside, rising 58.44 points in a massive display of buy programs that lasted right into the closing bell. Is this the way the market behaves when it’s ready to launch higher, or it is a sign of merely oversold buying which leads to lower prices shortly thereafter? That was the 9 th largest point move in history. Of the other nine in the “top ten” of such moves, every single one retraced that gain – gave it all back – in a fairly short period of time. I was a bit amazed to see that, but if you think about it, the only time the market can rise like that is in response to a very oversold condition – which means the market was already in a downtrend to begin with. So, these large moves have proven to be only temporarily bullish.
Some very wide (and wild) swings have taken place in the market in the last week. Has this changed anything as far as the intermediate-term trend goes? Probably not, but it does show the power of an oversold rally.
One area that is now important as resistance is 2820 -- the top of the first rally a couple of weeks ago. If $SPX were to climb above there and move higher, that would be a much more bullish sign and could change the outlook considerably.
Conventional wisdom holds that October is a bear killer. That is, the market starts to head south in September, accelerates in early October, and then bottoms some time in October. From there it rallies. So the decline – while sometimes very steep in early October – is terminated in October. Hence the term “bear killer.”