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Technical Market Report

The good news is:
 • The current decline will end soon leaving the market at a good pointfrom which to advance.

Short term

The NASDAQ new low indicator (OTC NL) is a 10% trend (19 day EMA) of NASDAQ new lows. OTC NL is plotted on an inverted Y axis so that then new lows are increasing the indicator moves downward and when new lows are decreasing the indicator moves upward (up is good). OTC NL is the best indicator I know of for identifying market bottoms. On a daily basis, OTC NL often gives false positives so it is prudent to wait until the indicator has been moving upward for 5 consecutive days before assuming a change in trend.

In the chart below the NASDAQ composite (OTC) is shown in red and OTC NL in blue. OTC NL went flat on Friday. The value of the indicator is 81 so any number of NASDAQ new lows greater than 81 will move the indicator downward and any number less than 81 will move the indicator upward.

Bollinger Bands (BB) are drawn 2 standard deviations either side of a simple 20 day moving average. An index will tag the upper BB near the beginning of an upward move and spend most of its time between the middle band (20 day SMA) and the upper band. The opposite is true during a downward move. Since the beginning of October the Russell 2000 (R2K), shown in the chart below, has spent most of its time at or near the lower BB.

Intermediate term

Summation indices (SI) are running totals of oscillator values.

The chart below shows the OTC in red, OTC AD SI calculated from NASDAQ advancing issues - declining issues, OTC HL SI calculated from NASDAQ new highs - new lows and OTC UD SI calculated from NASDAQ upside - downside volume. SI's are good intermediate term indicators and they are all moving sharply downward. Last Wednesday the AD and UD oscillators driving the SI's hit their lowest point since January. The HL oscillator is at its lowest point since February 2004.

Seasonality

Since the mid 1980's options expiration has often been blamed for unusual market behavior. Options expire on the 3rd Friday of the month which is next Friday. The tables below show how the market has behaved during the week preceding the 3rd Friday of October during the 1st year of the Presidential Cycle. There are summaries for the 1st year of the Presidential Cycle and for all years. OTC data covers the period from 1963 - 2004 and S&P 500 (SPX) data covers the period from 1928 - 2004. Since 1950, the week has been up about half of the time.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 0.13% 0.39% 0.37% 0.26% 0.04% 1.19%
1969-1 0.65% 1.26% 1.27% 0.83% 0.36% 4.37%
1973-1 -0.85% 0.01% -0.42% 0.14% 0.38% -0.74%
1977-1 0.09% 0.11% -0.81% 0.15% -0.06% -0.51%
1981-1 0.01% 0.33% -1.30% 0.22% 0.21% -0.53%
 
Avg 0.01% 0.42% -0.18% 0.32% 0.18% 0.75%
 
1985-1 0.89% 0.25% 0.60% 0.55% 0.05% 2.33%
1989-1 -1.35% -0.23% 0.73% 1.62% -0.03% 0.75%
1993-1 0.44% 0.63% 0.84% 0.83% 0.26% 2.99%
1997-1 0.18% -0.53% -0.54% -1.38% -1.93% -4.20%
2001-1 -0.42% 1.52% -4.40% 0.39% 1.12% -1.78%
 
Avg -0.05% 0.33% -0.55% 0.40% -0.11% 0.02%
 
OTC summary for Presidential Year 1 1965 - 2001
Avg -0.02% 0.37% -0.37% 0.36% 0.04% 0.39%
Win% 70% 80% 50% 90% 70% 50%
 
OTC summary for all years 1963 -2004
Avg 0.21% -0.04% -0.18% 0.32% -0.15% 0.17%
Win% 61% 55% 46% 67% 55% 50%
 
 
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1929-1 -0.68% -0.82% -3.50% 1.54% -2.86% -6.32%
1933-1 -2.00% 3.26% -4.63% -2.00% 2.90% -2.47%
1937-1 -4.38% 0.00% -0.08% -1.97% -1.09% -7.52%
1941-1 0.00% -0.61% -0.61% -1.44% 0.42% -2.25%
 
1945-1 0.36% -0.78% -1.51% 0.49% 0.49% -0.95%
1949-1 -1.01% 0.70% 0.57% -0.19% -0.31% -0.24%
1953-1 0.00% -0.38% 0.47% 1.14% 0.79% 2.02%
1957-1 0.73% 1.04% -0.82% -1.65% -0.79% -1.47%
1961-1 -0.28% 0.03% 0.50% 0.35% 0.04% 0.65%
 
Avg -0.05% 0.12% -0.16% 0.03% 0.04% 0.00%
 
1965-1 0.57% -0.02% -0.01% -0.16% 0.21% 0.58%
1969-1 1.06% 1.22% 0.02% 0.68% -0.11% 2.86%
1973-1 -1.25% 0.13% -0.20% 0.04% 0.19% -1.09%
1977-1 -0.10% -0.01% -1.16% 0.31% -0.38% -1.33%
1981-1 -0.20% -0.35% -1.64% 0.77% -0.43% -1.86%
 
Avg 0.02% 0.19% -0.60% 0.33% -0.11% -0.17%
 
1985-1 1.13% -0.16% 1.02% -0.17% -0.33% 1.50%
1989-1 2.76% -0.49% 0.18% 1.57% 0.01% 4.02%
1993-1 0.12% 0.05% 0.08% 1.16% 0.57% 1.99%
1997-1 0.12% 0.23% -0.47% -1.09% -1.16% -2.37%
2001-1 -0.15% 0.69% -1.86% -0.79% 0.46% -1.65%
 
Avg 0.80% 0.06% -0.21% 0.14% -0.09% 0.70%
 
SPX summary for Presidential Year 1 1929 - 2001
Avg -0.19% 0.21% -0.72% -0.07% -0.07% -0.84%
Win% 47% 50% 37% 53% 53% 37%
 
SPX summary for all years 1928 - 2004
Avg 0.02% 0.22% -0.24% 0.02% -0.13% -0.11%
Win% 53% 47% 44% 51% 45% 53%

Conclusion

There is still no evidence of a bottom; however, the market is oversold and likely to bounce.

I expect the major indices to be higher on Friday October 21 than they were on Friday October 14.

Last weeks positive forecast for a bounce was a miss. The hoped for bounce from an oversold condition may have begun Thursday and Friday, but it was too late and too weak to save my forecast.

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