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.

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 1^st (+-2 days) and would allow for a 30 day run to 90 days around Dec 1^st.*