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Broader market update for the week of 10/13/2014 – 10/17/2014.

We’ll continue to remain on the sidelines and preserve capital. We’ll add no positions until we see further evidence that the broader markets DJIA and S&P 500 can hold current levels for the remainder of this week.

Our research shows the remainder of the month of October should continue be incredibly volatile. That volatility soon just might avail itself primarily on the south side below the 200 day moving average. While Sunday night’s futures might give us an early indication and insight as to where we might open early Monday morning, short term it’s really anyone guess where we might end up by the end of the week let alone the end of the month. By the end of the month we expect a short term bottom will be in place. It’s just a matter of where and off what level. The reason why this week is so critical is because we moved through and closed below the 200 day moving average this past Friday for the first time since the beginning of last February. A single or two day break below the 200 day moving average does not a trend make as evidenced of last February’s break below and then quick reversal above the 200 day which is shown in chart A below. Rather a three or four day close below the 200 day is typically needed to confirm the line has been broken and the trend will continue lower depicted in chart B below.

Below are two chart examples of breaks below the 200 day moving average with different outcomes.

Example A : Last February’s DJIA chart below is an example of how quickly a reversal can happen even after a break and close below the 200 day. February was the  beginning of year 5 after the 2009 massive correction.

FEB 2014 200 day DJIA break 

Example B : 2012 was the last confirmed complete breakdown below the 200 day moving average over a multi-day period. Three to four weeks of consolidation before breaking back above the 200 day moving average.

2012 DJIA 200 day break

So based on the charts above we’ll need to have patience and wait and see what will happen over the next 3 to 4 days. Because the Russell 2000 and S&P mid cap 400 have been trading below their 200 day averages over the last week it’s our belief although no guarantees the DJIA and S&P 500 are now likely to follow and soon confirm a drop lower.

If the 200 day moving average doesn’t hold this week the next downside minor support level for the DJIA is the August low area between 16200 and 16300. Below that level is between 15800-16000. Our research shows this lower level should be a tradable bounce higher.

We’re currently compiling a list of January effect stocks for late November through the first part of February. We believe this will be one of the best January seasonal effects ever due to the mid to late year weakness in the small caps and low price stocks within the Russell 2000. This group has suffered significantly due in part to investors seeking instead stocks that offer a dividend yield. Next week we’ll post our results from last years January effect. If you haven’t already make sure you sign up for our newsletters and get your 1 month free.

Have a great week!

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