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Expect the Unexpected: The Market Could Soon Bottom

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This technical analysis indicates which numbers to watch out for if you want to move ahead of the herd.

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The prevailing universal sentiment is neutral to bearish by advisors and the general investing public. Who can really blame them given the Eurozone mess, the potential bank contagion collapse effect, and the weak economic trends both here and overseas. However, the work I do is almost entirely behavioral based analysis looking at crowd or herd behavioral patterns. Right now, things are adding up to a market bottom as early as the October 7-11 window of time and no later than October 28. The figures I have had for a long time are 1088 for a bottom with a possible worst case spillover of 1055-1062 in the S&P 500. We are already eyeing the gold stocks as bottoming out as well, and have begun to nibble. We plan to buy more on further dips.

Let's examine some of the evidence and then look the charts:

1. Sentiment in recent individual investor surveys had only 25% of those polled bullish. Historically that average is 39% or higher.

2. The volatility index has been pegging the 43-45 window recently and historically markets have major reversals anywhere from 45-50, with rare cases of that index going over 50 without a major reversal.

3. The German DAX index is carving out what looks like a bottom channel, and if it can hold the 5300 plus ranges, it could be a leading indicator of a US stock market run.

4. Seasonally, markets tend to bottom in the September-October window with favorable patterns from November into March/April.

5. Historically, markets tend to correct hard with a "new moon in Libra" which occurred last Tuesday, the same day the market peaked at 1196 and rolled over hard. They often bottom with the following full moon, which is scheduled for October 11th.

6. Elliott Wave patterns I use indicate we are in the final 5th wave stage since the 1370 Bin Laden highs, with a gap in the SP 500 chart at 1088 from September 2010 still to fill. That gap happens to coincide as 78.6% Fibonacci retracement of the 2010 lows to the 2011 highs. It's also has a 50% Fibonacci correlation with the 1356 high to 1101 swing move this summer.

Bottom line is the S&P 500 has withstood a ton of pots and pans and bad news over the past 8 weeks. The market tends to price in a soft patch in the economy way before it becomes evident in the data. To wit, when we topped at 1370 in May of this year, it was an exact 78.6% retracement to the upside of the 2007 highs to 2009 lows. The pullback to 1101 is an exact 38% Fibonacci retracement of the 2011 highs and the 2009 lows. Markets are not as random as everyone thinks, and if you can lay out a road map in advance and understand where key pivots are, you can swing the opposite direction of the herd and profit quite handsomely.

Below are two charts showing two likely outcomes in the SP 500 index in the coming several days to few weeks:


Click to enlarge


Click to enlarge


Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.
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No positions in stocks mentioned.

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