How low can it go?

August 21, 20134 Comments

The S&P 500 has begun its traditional seasonal period of weakness. So far, we’ve witnessed a 3% drawdown from its early August highs. Technical people who watch moving averages usually view a penetration of the 50 day MA as bearish, and that happened last week. Markets usually remain weak or volatile until the end of September. Although the traditional “buy” period is the end of October according to the seasonal experts, ironically October is not, on average, a low point on the market. In fact, it’s been (on average) positive since 1950, according to Brooke Thackray’s Investors Guide. The problem is, October—when bad, is really bad! October 1987’s Black Monday and October 1997’s Asian Contagion, not to mention October 2002 and 2007 all come to mind. So it’s a geometric issue (a size of price movement problem) rather than an arithmetic issue (a frequency or average %movement). October is usually an OK time to be in the market, but when it’s not, it’s not!

So I’ll stick my neck out and bet that markets will remain volatile with a negative bias until near the end of September. But I won’t guess as to what October will bring. It really all depends on the outcome of the Sept 18th Fed meeting. All eyes will be on Ben Bernanke. Should he suggest a relatively modest QE tapering plan, the markets may take it as a positive. Look for a bullish October if that’s the case. Should he introduce a dramatic tapering plan—look out below. Today’s chart shows the potential downside targets over the coming 4+ weeks. My notations are on the chart – click it to enlarge.

Keith on BNN

I’ll be on MarketCall Tonight this Friday August 23rd at 6pm. Feel free to phone in with your questions on technical analysis during the show. CALL TOLL-FREE 1-855-326-6266. Or email your questions ahead of time (specify they are for me) to [email protected]

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  • Hi Keith:
    A big thanks for your many pertinent and excellent articles.
    S&P 500 – Your deferring to the September Fed action as opposed to solely the technical makes absolute sense. US homebuilders – I have been playing the bounce with a tight stop and only just read your opinion. The seasonals do not kick in yet. Gold – I am totally frustrated with this action in the 1374 – 1377 range. AIG – a great suggestion at a time when there appears to be fewer easy entry points.

    Again thanks, and of course, I will reserve my questions and time to watch you light up BNN with some great technical analysis.

    • Thanks Khokon
      Be sure to say you read my blog if you call the show with questions-I always like to know if I’m talking to a reader. I’m gearing up for the show this morning–one of the tricks is to try to guess what viewers are going to ask (ie whats “hot and in the news”). I suspect it will be gold, silver, oil in a big way, so will be ready to talk those area’s extensively–plus anything else that comes up.

  • hi Keith,

    just looking at stockchart today and i finally see a bounce at IEF and TLT. i know it is a bit premature to call that move a “trend” but would it be the start of that seasonal pattern?

    • Hey Jean Pierre–I think its the beginning of an oversold bounce for the bonds – I dont see it lasting all that long–TLT perhaps back to 110 or 116 at old support (new resistance). Perhaps during September it will finally go into its seasonal pattern
      BTW–on BNN today 6pm – the bond question may come up.


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