Wall Street Holds Its Recent Form with Four More Trading Days in October
The first three weeks of October have been among the best for this often dour month for stock markets and against a background of quite bearish sentiment no less. That, of course, is a key reason why this October has surprised even the bulls. The bearish sentiment evident in August and September, as markets swooned, represented a rush to cash and also a build up of short positions.
Technically, those are among the best preconditions for a good rally, but how do we know if demand had regained the upper hand beyond a temporary rebound. That is a challenging question and there are few certainties about the future.
Nevertheless, there are clues and subscribers may recall my technical leader on 13th October, following the first move by the S&P 500 Index from an oversold reading to a technical short-term overbought condition, shown in italics below. Basically, what the market did from that point would show us whether or not demand had regained the upper hand, and tell us a lot about the medium-term outlook extending through 1Q 2016.
The best case outlook would be a temporary consolidation near current levels, followed by a further push up into this year’s top area. That would clearly demonstrate that demand still had the upper hand. Alternatively, a consolidation which took more time – after all, this is October – would still be positive provided that it did not move much below 1950. Lastly, sentiment would deteriorate on a retest of the August-September lows, not least because overhead supply had once again reversed the rallies.
Basically, some US indices still show a mixed picture, namely the DJ Transports and DJ Utilities Indices, which gave the lead to the downside. The small cap Russell 2000 is also underperforming. While all have steadied, they still show a soft US economy.
More importantly, I suggest, the Nasdaq 100 and Nasdaq Composite Indices, which led the often unloved or mistrusted US bull market have roared back to within striking distance of their highs. The DJ Industrials Average has lagged somewhat but nevertheless seen a persistent rally this month. All three are clearly above their MAs, which have also turned upwards once again as we approach the end of the May through October period of annual underperformance, on average.
We will always live in an uncertain world for stock markets but these performances bode well for at least the next six months.
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