Breadth Summation index remains Bearish

The Breadth Summation index (BSI) remains Bearish after turning down in late August and readers who listened to our warnings last month avoided or even profited from the serious decline in September. Since we are seeing some of the worst financial news in 50 years or more, the BSI is unlikely to turn up before it reaches levels at least as deep as we saw in January or July and we are not there yet. I expect we will make a capitulation low near one of the Cardinal Moons this month as discussed below.

The Weekly BSI is made up of a dozen Breadth and Momentum indicators and is a good measure of oversold and overbought conditions. It makes a very good swing trading system that can avoid all negative periods while keeping much of the gains in the positive phases. It is interpreted as Bullish when turning up from low levels, and Bearish when turning down from high levels.

The Cardinal Moons of October 14th and 28th

The word Cardinal comes from the Latin cardo for "hinge" or turning point, and that is why we refer to the turns in seasons as Cardinal dates. We are all affected to some degree by the beginning of a new season, and this is often reflected with a change in psychology as we saw with the March 21, 08 change of trend and season this year. Chris Carolan's 1998 award for his work on Financial Panics showed that they almost always occur on a Cardinal Moon. While large Panics like 1929 and 1987 are rare, smaller versions of the same phenomena occur quite frequently as we saw on the Cardinal Moon of January 22, 08. This Cardinal Lunar month is the 7th month of the Jewish Calendar and home to both the 1929 and 1987 Panics, and must be taken seriously despite the fact that both the 1929 and 1987 Panics occurred from very overbought levels and we are now very oversold instead. This makes a 1929 or 1987 style Panic unlikely, but it makes a capitulation sell-off like January 22, 08 very likely near either of the October 14th Full Moon or the October 28th New Moon.

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Examples of Cardinal Moons in 2002, 2000, 1987 and 1929

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Full Moon of October 14th and New Moon of October 28th

Full Moons are statistically lows and this Moon happens to fall near the 6 year anniversary of the previous Bear market low of October 10, 2002 making it a strong candidate for a low. However the Moons do invert quite often as shown in blue below, and we may see a rally first into the Full Moon of October 14th before it fails into a capitulation low and possible Panic just before the New Moon of October 28th. This would be more in line with previous Fall Panics which have occurred near the New Moon, and will be fairly easy to detect early on.

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Possible Elliott Wave targets

The SPX is struggling down with heavy overlap since August compared to previous decline in June and warning us that a low is near, not unlike the struggle down into the mid March low. If the June decline was a Wave 3, then we should make a low this Fall near 1070 to keep Wave 5 equal to Wave 3, or drop lower to the parallel channel lines near 1020 or 990 which would make Wave 5 equal to Wave 1. The alternative count has the SPX in a Wave 3 of 3 and that would take us much lower as discussed below.

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Alternate Elliott Wave targets

The alternate count is more bearish and has the SPX already in Wave 3 instead of ending Wave 1 in the scenario above. This would imply a move to the 1000 area, which is the bottom gray line of an exact duplicate of the expanding triangle we built from 2000-2003. Irrespective of where we are in the Wave count, we are about to make a capitulation low that should give a sharp rally much like in April 2001. The blue VIX line on top of the chart has entered into the Panic zone, but the blue Put/Call and Tick lines as well as Price still have room to fall before they reach their respective support lines.

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Capitulation is still missing

The Dick Arms index or Trin is a fly in the ointment of the Bulls who expect a good low with this rescue package and I have seen a lot of explanations in the media for why this time is different. The markets are driven by human nature and any student of history will tell you that fear and greed has changed little in thousands of years. It is likely that this time is not different and this indicator will need a capitulation spike lower before a lasting low is made. This indicator has also printed an obvious double Head and Shoulders pattern with this rescue plan that may be forecasting that spike lower.

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A relative perspective on oversold

The SPX to VIX ratio is a great measure of relative fear and it has amazingly nailed the exact lows of 1994, 1998, and 2002 when it reached the 20-22 level. It is likely that we will close the month of October or November with the SPX near 1000 and the VIX near 50 so this indicator can print a 20-22 value as it rolls into the following month.

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