The Chart du Jour

Not a Month of Which We are Proud

October 29, 2001

By, Barclay T. Leib

October has not been our favorite month. First we expected to see an equity low develop into October, only to see that low occur at the correct level, but during the "wrong" window of time in late September. Then we advised subscribers that the rally into October 11th was likely to be yet another reaction rally that would once again fail. After that prognostication, we have only witnessed prices grinding modestly higher in spite of our belief that the late September lows are in need of a serious retest. Most recently, we have advised staying short as long as 1111 was not abrogated on a close of business basis. To date, we have avoided electing this stop -- but admittedly not by much.

All of the above acknowledged, when we now pull up our Fibonacci bands on the emerging hourly rhythm of the S&P 500 cash index, we have to admit that the recent high at 1108.62 doesn't exactly excite us. Specifically, it doesn't "fit" the rhythm of the price ascent of the index since late September. Indeed the next level where our Fibonacci bands will now sport a more complete rhythm is up near 1124.30, not 1108.62.

While we thus continue to believe that this reaction rally period will ultimately fail, the most recent price action of this index suggests that it will first take out our 1111 stop. Perhaps this will just be a fitting end to a month where our ideas have been somewhat out of synch with the short term price behavior. Indeed, if we had to bet, October might well go out on its highs, only to see a sudden reversal once the calendar switches to November. This is very different than our originally anticipated rhythm where an October low would have led to a reaction rally in November. That reaction rally has in quite simple terms materialized early and appears set to carry further upward than we would have originally anticipated.

Chart constructed with Advanced GET End-of-Day>

It is not easy for us to post this update. Some readers are likely already short and will feel lost, confused, or even betrayed that the stop they were leaning against at 1111, is suddenly being abandonned, while our view for an ultimate retest of the September low is not. All we can say is that corrective periods are by their very nature more sloppy and difficult to forecast than periods of impulsive market behavior. By definition, a correction is designed to lure in as many people as possible to believe that a new uptrend is in place. Hopefully by piping up now, perhaps we can still salvage the current situation by using any Monday weakness (of which we expect a bit) to get flat, and then live to reestablish shorts later on.

The current rally is certainly not one to buy into. But selling it too early has also been hazardous to our health. Please forgive our inability to have been of better service this month.

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