October 31st, 2009

Stock Market Road Map

Has a consolidation correction actually already begun and we just don’t realize it?

We’ve been in an uptrend frame-of-mind for so long, that it’s sometimes difficult to fathom that something might have changed or that the current market just isn’t what we’ve grown pleasantly accustomed to over the past seven months. But my sense over the past several weeks is that something has changed. Besides the nearly 3% drubbing the market took on Friday and the whipsawing swings of sentiment on Wednesday and Thursday, are being broken and there’s increased risk of moving averages being crossed.

So let’s zero in more closely than usual, step by step, on the market’s recent action to see if we can distill out clues to whether the market is possibly in the early phases of an emerging chart pattern or whether the uptrend is still intact so we don’t feel like we’re wondering aimlessly:

  • End of Month Patterns: This is probably the first time you will have heard this but the Sept-Oct had a distinctive bend to them this year. Instead of following historical precedent as the “worst months of the year”, September and October (and to a lesser degree August) had awful end-of-month cycles. The last 7 trading days of September plus October 1 and the last 9 trading days of October turned in 3.9% and 5.62% declines; the final 3 days of August plus September 1 likewise saw a 3.2% decline. The first portion of both months showed respectable gains. If November follows suit, Monday won’t be good but the remainder of the month to around Thanksgiving could deliver a sizable gain.
  • Trendlines: I’ve inserted an upward sloping channel by connecting the pivot points (points where balance of power flipped between buyers and sellers) at the beginnings and ends of those end-of-month declines discussed above. Since Friday’s close violated the bottom support trendline, the obvious question is where will be the next low. My guess is that Monday, November 2, could see an intraday low at a key level, 1018, another 1.7% decline, since that was the intraday low on October 1 and a level the market gaped through in August. It seems to be an important play area for the market. [Coincidentally, my Elliottician friends are quick to point out, 1014.8 is a 38.2% Fibinacci retracement level between the 1098.74 close and the 879.13. A bounce at this level with conviction will support a continuation of the trend.]

    If the market successfully bounces around 1018, there’s a possibility it could then lunge ahead following the September-October routine for a final gasping 10.5% gain to 1125, with the sidelined cash finally being put to work before year-end. The 1125-1150 range of significant for several reasons: 1) it’s been mentioned by many analysts as the high for the year and 2) it’s on the extension of top boundary of that channel.

  • Moving Averages: Although the 50-DMA was violated last week, the 100-DMA is still intact and will probably remain so in the near term.

    Violating the 50- (and 200-) day moving average wasn’t calamitous in July (the market then proceeded to surge ahead by over 25%). Another big, though not as extreme, move may follow this violation. Simultaneously, the 200- may cross the 300-dma and the 300-could turn up (as described in “Mark These Dates …..“) paving the way more gains later.

  • A Reversal Formation: If the market does bounce around 1018 either Monday or Tuesday, then the level becomes an important element, along with the October and November peaks in defining a pattern that could dictate the course of the market during the first half of 2010. Will these precursors become the early phase of a reversal or merely the beginning of a consolidation pattern. We’ll leave predictions like that for economists (and stock analysts focusing on fundamentals); for chartists, all we can do is anticipate and be prepared to react when it happens.

Some inquisitive readers may question “What happens if you’re wrong? How will you know if you’re wrong?” Agreed, this is pure speculation but it’s a plan, a map, and we use maps to help us know where we are and find our way to where we want to go. If the map indicates a turn but the road goes straight or if it indicates straight but the road has a bend then …. we know we’re in the wrong place and we have to change our course.

That’s the same with this fictional market road map for the next couple of months. Rather than a prediction, it’s a plan of action for managing risk and measuring expectations. As of Wednesday next week, we’ll know whether the risks are higher and plans and actions have to change or, if we’re lucky, we’ll see higher prices by Thanksgiving.

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  • Anonymous

    Violating the 50- (and 200-) day moving average wasn't calamitous in July (the market then proceeded to surge ahead by over 25%)— You mean 15%..

    Also FED Meeting next Wed..so market could be flat or down till Wesdenday…

  • Anonymous

    What do u think of "stockTA.com" for analyzing individual stocks? Any thoughts? Thanks.

  • Joseph Meth

    Interesting site but I feel you need a guide to navigate and use it. There's no editorializing or commentary … they let the numbers and charts to speak for themselves.

    I think you need to be fairly knowledgeable in order to get the full benefits out of it.

  • puravida19

    Bearish possibilities include a head and shoulders or MA pattern.

    There have been a number of trend changes in this last drop. Violations of trendlines and moving averages for example.
    There have also been time and cycle patterns that have been reached.
    Wouldn't 1125 be more justified if these points I made had not occurred?
    We have a lower low, lower high pattern working right now.
    Thanks for your educational blog.

  • Brady

    Guru, great catch on month end patterns. It turns out intra-day low on Nov.2nd is 1030, 12 points higher than Oct.2nd low. Thanks for the road map.