Short termed gains & long termed pains?

Market technical observations point towards a decent chance of a rally in the near-term. From there, it is to be seen if such a rally can stick. Below are some highlights of my neartermed and longer termed observations of late. Plus a new insight from BMO on the potential for a Q4 rally.

Short termed gains?

Fourth quarter performance is often bullish when markets have a big drawdown in the third quarter – like the drawdown we witnessed between August and September of this year. Technical observations inspired ValueTrend to take a small position and play that potential. I noted in this blog :   “a channel test, a reversal candle and some momentum oscillator hooks suggesting some upside potential”. Here’s my chart from last week with those observations, not updated.

BMO presents some historical data backing my technical observations for an opportunity for a bounce in the final months of this year. Beyond the string of sharp drawdowns surrounding the Great Depression, note how selloffs (spikes down on the chart below) are generally followed by rallies in Q4.

Long termed pains?

I’ve recently noted that markets typically flush out with one final capitulation drawdown. In this blog, I noted that most bear markets end with a capitulation phase. Here, again, I quote myself:

“When looking for the “true” bear market bottom, as opposed to a rally, we will probably want to see a washout candlestick such as a hammer. See my Online Technical Trading Course for more on that. That, and extreme washout in the VIX to well over 40. What this means is – you need to see a big day or two where the market reacts violently down, usually driven by a significant point of bad news”

The diagram below illustrates the Investor cycle. The big spike on the VIX noted above, in conjunction with a bad news item, and the “nowhere to hide” selloff on virtually every stock sector out there, will signal despondency. We aren’t there yet in my opinion. But we are close.

The S&P 500 continues to hold support at 3600. Keep this chart in mind as you watch the longer termed patterns. After a potential neartermed rally into the 4000-4100 area (top of trend channel, 200 day SMA zone), you want to see if that can hold. At any time, a break of 3600 means the bet is off.

Assuming we see 4000-4100: If 4000-ish doesn’t break out, and we see a reversal to see 3600 penetrated, there are several points of support one might see in a final capitulation moment. These support levels are represented by my green horizontal lines below.

The longer termed chart shows a trendline that represents the lowest green support zone (2500-ish) noted above. This was discussed in my “Worst case scenario” blog.

Conclusion

I’m reasonably optimistic for a quick n’ dirty rally – similar to that seen this past summer. I’m not convinced that a rally , assuming we get one, signals the end of the bear market. Lets just watch to see what happens rather than predict. For now, I’ve put one small leg back into the market. I’ll become more optimistic if we see a bullish break through the 200 day SMA. One step at a time.