Quarter 4 – October 2010 Preview

October, the infamous month of all the major crashes in stock market history, is upon us. The market has already been a basket of surprises this year and one must wonder what other shocks the market still has up its sleeve.

The month strikes fear into the heart of investors all over the world as they remember the massive losses in the years of 1929, 1987 and 1997. October also brings back memories of the market slaughters of 1978 and 1979, Friday the 13th of 1989 and the most recent 2007 downturn of the Sub-prime Mortgage Crisis and the 2008 meltdown which set records.

But what few know about is how October has also turned a bear market into amazing bull runs in the years of 1946, 4957, 1960, 1962, 1966, 1974, 1987, 1990, 1998, 2001 and 2002.

October also ends the worst 6 months in the market and the end of October starts the best six months on the DOW and S&P500. It also starts the best 8 months on the NASDAQ.

October tends to start poorly, gets worse in the second week, volatile in the third and finishes bullishly. Thus, if October doesn’t start anything tragic, the end of October is the time to BUY!

The 11 year old median of 10,750 on the DOW is going to be make-or-break in October. It was the scene of the breakdown in 2001, the point of resistance between 2004 and 2005 which became the support launch-pad for the 2006 rally, the last stand before that massive capitulation in 2008.

Here we are once more, to test history again. As of Friday 24 September’s close, DOW made a massive gain to close at 10,860. This made it the 4th consecutive week up which then turned into a 5th Candle Reversal in the last week of the month to close September at 10,788.05. In spite of that, it was still the best close for a September month since 1939 – that 71 years! (YTD, DOW is up 3.9% as of Friday’s close) … but that 5th is a rather ominous way to welcome October. The S&P500 got out of the red and rose 8.8% for the month, also a record high close for September since the 1930s.

But if history has any say about this and if patterns do repeat themselves, we could be in for a rough ride in the coming months because every time the S&P500 made a massive gain in September, the following months experienced some serious corrections. Could it happen again?

Now that DOW has broken above 10,750, it is crucial that it holds above that critical level by the end of the month as this will be a confidence boost for the bulls. But a failure and a break below could spell trouble for the market going into the final two months – let’s not forget that we’re still on a Bearish January Barometer for the year.

If the DOW is to repeat the start of a bull run like it did in 2006, then holding above 10,750 is going to be a key issue. As it stands, the economy may not be in as bad a state as the naysayers make it out to be. In fact, although growth has slowed, there is still growth albeit as a slower and more realistic rate. And I don’t see it as a bad thing going into the end of the year.

Earnings Season for Quarter3 results begins this week with AA on Thursday. The results of this earnings season will be key to where the market closes for the rest of the year. So far its been one heck of a rocky ride with the market swinging between the red and black at least three times this year and tradition hardly holding any water at all and all sorts of records being broken and some new ones being set.

Bonds and gold are not making the market a happy place especially when volumes continue to suck. It also looks like commodities (ag complex) have kinda ended their magnificent run and it remains to be seen if a capitulation is at hand or if shortages continue to drive prices up.

I’ve made enough from the market this year already and I am going to take the last quarter a little slower. I will choose to trade only if the market shows some improvement in volumes and more clear signs of an improving economy. I am not going to tempt fate and lose what I’ve already made.

So bring on the last quarter and let’s get this party started … I could use a bonus this year!! 


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