Sunday, October 2, 2011

Outlook For October

The opinions about the market's direction vary across the board from the most bearish to quite bullish.  This is not surprising given the fact that the SP500 has been trading in a range now for over 6 weeks, and no one really knows when it breakout in either direction or form an intermediate term low.

I have seen comparisons made with a number of past markets.  Tom McClellan has shown a strong correlation to 1946 (65 year cycle).  I think there is a strong correlation to late 2007 and early 2008 (4 year cycle).  Both correlations seem to be saying the same thing:  there will likely be some type of bottom by the end of October.  I suspect probably around October 13, if not, then probably by October 28.  Others disagree and suggest that the downtrend will continue until the end of the year.  I don't think that is likely given the severity of the recent decline, but anything is possible.

The key is not to fall into the trap of believing that any one particular view must be the right one.  Let the market lead and only take high probability setups.  The current market environment is not conducive to trend following.  That will change at some point, but we will have to be patient.

Perhaps the best approach would be to use an indicator like the MACD to enter on a positive divergence buy signal.

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