Technical observations of RossClark@shaw.ca
The US markets are entering a time frame for an anticipated interim low. The indices are also getting close to generating important capitulation signals. If the S&P 500 and Dow Industrials close lower on the week of October 10th they will produce weekly Capitulation alerts. These are rare events for these indices, having occurred only twelve times in over a century. Following an interim low we will look for a multi-week relief rally that retraces 40-50% of the decline from the August highs and then a retest of the lows.
In the case of the Dow Industrials the last Capitulation signals occurred in 1966 and the later part of the 1929 to 1932 bear market; October 1931, December 1931 & May 1932. Prior to that there were two clusters; October 16th to 23rd 1903 and at the end of the banking crisis from October 18th to Nov 22nd 1907.
The S&P has produced seven clusters of signals since 1950. They all occurred around important multi-month lows;
The action around the signals has been fairly consistent. Seven of the twelve Capitulation alerts resulted in a bottom that week or the following week. Three bottomed within the second or third week. The conclusion is that if next week is down then the likelihood of an upside reversal in the second half of the month is quite good.
Sequential Buy Setups occurred around eight of the Capitulation lows (see following charts). In six of those instances it only required a count of seven weeks rather than the normal nine weeks of development to reach a bottom. (It took nine weeks in 2002 and thirteen weeks in 1974). We are currently at week number five in the count. If the next two Friday’s closes are below those of September 12th & 19th then a seven week count will be in place and an upside reversal becomes likely.
Another tool has been the often-seen 37 to 55-day plunge to market capitulation. Depending on which market average one uses it is now 35 to 39 weekdays since the market topped in August so a climactic low could be in place by October 27th. There is also the seasonal component whereby most of the great fall liquidations have ended in late October.
As we move through this month we will update as more pieces of the puzzle become apparent.
CHARTWORKS - OCTOBER 6, 2008
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