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Monday 20 September 2010

Historical weakness after September opex

I've been giving likely market direction from here a lot of thought over the last few days and zstocks kindly threw some stats my way over the weekend.

The first stats fit my thoughts for this week very well, with the stats from the Stock Traders Almanac saying that in the week after September triple witching Dow has been down seven out of eight years since 2002. I am expecting to see that become eight out of nine this week, though obviously we have a major wild card in the Fed meeting tomorrow.

We've seen a short term divergence on the Vix, and a rising Vix frequently signals a short term top:

The rising wedge on the SPX 60min chart has also broken downwards and I have eliminated the option of it breaking up to form a steeper declining channel as a result. The blue dotted trendline gives the target area this week if we are going to see this rising wedge turn into a rising channel:

The Emerging Markets futures chart that I posted last week shows these, often an excellent leading indicator, are leading the way down towards the big rising wedge lower trendline, which I'm expecting to see hit this week:

Longer term the picture is looking more bullish. We've just had yet another cross of the 13/34 weekly SPX EMAs, the fourth in recent months, and while this has obviously not been a reliable indicator this year I'm not expecting to see it cross again in the near future. At four crosses this is already more crosses than we've seen for any year in the last thirty years:

McHugh posted an interesting analysis of what he described as Autumn declines on the Dow which you can see here, but the dates he was using seemed rather fuzzy, so I had a look myself at the four month period at the end of the year for the last 20 years and came up with this rough and ready summary:
  • 2010 - Up ~5% at 20th September
  • 2009 - Up ~11%
  • 2008 - Down ~25%
  • 2007 - Down ~1%
  • 2006 - Up ~9%
  • 2005 - Up~3%
  • 2004 - Up ~6%
  • 2003 - Up ~10%
  • 2002 - Down ~3%
  • 2001 - Up ~1%
  • 2000 - Down ~4%
  • 1999 - Up ~4%
  • 1998 - Up ~15%
  • 1997 - Up ~1%
  • 1996 - Up ~7%
  • 1995 - Up ~10%
  • 1994 - Down ~2%
  • 1993 - Up ~3%
  • 1992 - Up ~2%
  • 1991 - Up ~4%
  • 1990 - Up ~1%
In the September to December period therefore we have seen rises in 16 out of the last 20 years, with five rises of 9% or more, and only one decline of more than 4%. That fits with my expectations because we are coming towards the close of the traditionally weak period of the year and the fourth quarter as a whole is traditionally fairly strong.

Have the bears therefore missed their chance this summer? I think so, we've traded sideways rather than down after the declines in late April and May, and looking at this most recent peak compared to the last 1130 test on SPX, I'm seeing a lot of indications that regardless of what happens this week, we're likely to see more upside after that. Pug's been looking at a new count that sees the action since the April peak as a corrective fourth wave and that fits my expectations for the next few months well, with a fifth wave having started at the July low and likely to take us to a new high on SPX before a deeper retracement next year. Alphahorn also thinks that is very possible and that is both of the EW analysts that I look at often, though Alphahorn thinks a deeper move down here is also very possible.

We'll see how it goes this week. If we are going to break decisively above the 1130 SPX IHS neckline after this week then I would expect that the strong support level in the 1085 - 1090 SPX area will hold, and if we get there I'll therefore be seeing that as a good buying opportunity.

In the very short term we're seeing some strength on ES this morning, and that may be sustained for much of today. On the ES 15min chart I'm seeing strong resistance in the 1137 area, though I doubt we will see ES rise that far, and the lower blue trendline shows short term rising support, currently in the 1119 area. A break of that would indicate strongly towards a test of gap support at 1110 ES:

Of the other charts I'm watching copper is at resistance in the 352.5 area again, GBPUSD, EURUSD and AUDUSD are all within last week's trading ranges, with AUD near the top of that range and GBP near the bottom. Oil looks interesting, with a fall to rising support on Friday. If we see the SPX weakness that I am expecting this week then I would expect a fall to the H&S neckline at 71, and as the fundamentals and stock levels on oil suggest relative weakness we could see that pattern play out regardless of what happens elsewhere over the next few weeks:

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