October Outlook: Patience, Buy Signal Setting Up
By: Jeffrey A. Hirsch & Christopher Mistal
September 29, 2015
Patience is still in order. We are getting ready for our perennial Best Six Months Seasonal MACD Buy Signal, but there is no rush. The market is still reeling from the recent selloff and the technical and fundamental picture is not yet so favorable. Fundamentals may not improve so much over the next six months, but technical market indicators likely will – at least over the short and intermediate term. 
While we anticipate a fourth quarter rally, new highs will be hard to come by. Seasonality has been rather helpful this year. We have been cautious since the spring and on the sidelines for the most part since our June 4 NASDAQ Best Eight Months MACD Sell Signal. The carnage that occurred in the worst two months (August and September) is nearing the end, though it does not appear to be over just yet.
In the meantime the Three Peaks and a Dome House Top Pattern (3PDH) we have been tracking since last October, has run its course. This is not to say that the market will not go any lower, but by definition it has reached its minimum low which corresponds to the separating decline low of last October at points 10/14. In the chart below of the 3PDH we have also drawn the pending set up of a “W” bottom pattern or a 1-2-3 swing bottom formation (Our good friend John Person schooled us on this pattern several years ago.) A break above the mid-September high around DJIA 16750 would be bullish.
[3PDH Chart]
[Basic Model Image]
MACD Seasonal Buy Signal Update
Our Seasonal MACD Buy signal cannot trigger until October 1 or later. Presently, the MACD indicators in the major averages have turned down. Stochastics and relative strength are also negative, but things are beginning to look oversold. Sentiment has become rather negative with more bearish advisors than bullish, though Put/Call has yet to go to extreme on a weekly basis. The daily CBOE equity only put/call ratio did go over 1.00 back on August 21 for one day. 
In order for us to issue our official Best Six and Eight Months MACD Seasonal Buy signal we will be looking for confirmation across the three major averages: DJIA, S&P 500 and NASDAQ Composites. When this occurs and email will be sent to all subscribers after the close. At that time we will also update any open or new ETF sector trades, including a new buy limit for iShares NASDAQ Biotech (IBB) which was stopped out recently on the Hilary Clinton tweet. We believe this is overdone and relish the cheaper price opportunity, but please be patient, there is no rush. In the sagacious words of Baron Rothschild, “We never buy at the bottom and we always sell to soon.”
Pulse of the Market
DJIA plunged to its August 25 low in just a handful of days then slowly began to climb back before rolling over once again this month. DJIA appears to be tracing out a “W” or 1-2-3 bottom (1). Point 1 is the low on August 25; point 2 is its September 16 high and is in the process of finding point 3. For this pattern to complete, point 3 will need to be equal to or greater than point 1 and DJIA will need to rally back above point 2 to confirm the bottom is in. 
As of yesterday’s market close the faster moving MACD “buy” indicator applied to DJIA (2) is negative again. A close today below 16,134.68 will also cause the slower moving MACD “sell” indicator to become negative. Near textbook end-of-Q3 weakness is setting our Seasonal MACD Buy signal up nicely. It can trigger on or after October 1. An email Alert will be sent when MACD indicators applied to DJIA, S&P 500 and NASDAQ are all on buy. 
Dow Jones Industrials & MACD Chart
Over the past 20 weeks, there have been a total of 8 down Friday/down Monday warnings (DF/DM). The most recent two occurred at the end of August (3) and like nearly all DF/DM’s since 1999, market weakness has followed. Friday (or the last trading day of the week) has been down 14 of the last 20 weeks. Traders and investors reluctant to hold long positions over the weekend is a sign that market confidence is tepid. Any improvement to Friday’s trading could be an early sign that the market is ready to rebound. 
Losses for the week ending August 21, –5.8% for S&P 500 (4) and –6.8% for NASDAQ (5) were the largest declines since September and August 2011 respectively. Declines from four years ago were near the tail end of the last market correction (a decline of 10-20%). Provided economic data and outlooks don’t deteriorate any further, the current correction could be nearing its end.
NYSE Weekly Advance, Decline, High and Low metrics continue to paint a weak outlook for the market. During positive weeks, Advancers only modestly exceed Decliners while during down weeks Decliners outnumber advancers by a wider margin (6). New Highs (7) most likely bottomed the last week of August at 18. That was the fewest number since May 2009. New Lows also spiked to their highest number that week since August 2011. The market’s final bottom may not yet be in, but New Highs and New Lows have likely recorded their extremes.
Weekly CBOE Put/Call Ratio (8) has recorded two readings above 0.80 in the past six weeks. The first reading was during the week ending August 21 and the second was September 18. This is an elevated level indicative of greater levels of fear and is in the range reached during the last market correction/mini-bear of 2011.
The 90-Day Treasury Rate (9) at 0.00 is not a typo and is the lowest it has ever been going back to 1954. 
Click for larger graphic…
Pulse of the Market Table