October Commentary

Let's look at the pre-election market to see if there is factual information we can use to our advantage as traders. There is a lot of wise statements made about an election year market and the post election market. Our goal is to analyse the technical state of the market avoiding external influence that we can factor later on. First we want to look at three indices commonly used by the investor: the Dow-Jones Industrial Average, the NASDAQ Composite Index and the Standard & Poor 100 Index. We avoid selecting only industrial indices, we need a broader picture. Our first finding is a common wave iii (circled in red), two in August and one in May. At the end of this wave iii, all indices were bearish in a medium term perspective. As of today, two of them remain bearish while the third one is bullish. Another finding is that NASDAQ has moved above an important resistance level, that now acts as a support level. On the DJ and the S&P, the old support level is still holding although the short term ones have yielded. To appraise this type of situation, AlphOmega uses an automatic Timeframe Resistance and Support indicator (the thick orange lines on the right side of each chart). This tool can show the previous month resistance (the highest high) and support (the lowest low) levels even if you are in a 5 minute chart or a daily chart. It also shows Fibonacci retracement or extension from theses levels. Back to our analysis, we see from the orange lines that NASDAQ has already penetrated once the previous month resistance and is now testing the support at the old resistance of 61.8% retracement from top. Since NASDAQ switched from bearish in May to bullish after wave iii, can we expect the DJ and the S&P to follow their high-tech companion?

                                                                      

Click on the image to enlarge.

Keeping with the facts, we observe that the retracement NASDAQ made after the peak (yellow highlight), is smaller than the retracement the other two indices are making. This we may even factor as a divergence. The volume is up on NASDAQ and the DJ but down a little with the S&P. The least we can say is that the market is in a sort of expectation with a slight edge to optimism. The medium term bearish trend is not a very strong one while the bullish one seems a little weak with its test at 61.8% retracement. Yet this is not a neutral market with two volume averages increasing. Since the STORSI and the Demand Index are respectively in an oversold position and a low, we should expect a moderate bullish rally until the end of this year. Can it be sustained is another question. All the external data (from a technical analysis standpoint) such as economics and politics are more pessimistic, even if you ignore the outcome of the election. This would favour another consolidation period although the US economy is rather resilient. Everyone can say that the market will eventually be bullish or bearish and it will happen! The crucial part is when and for how long, can we trade effectively with our market analysis.