By Paul Cherney
Historically, after a big losing September quarter, the October lows have occurred in the first half of the month.
In Octobers after a September quarter which loses more than 10%, the average of all the October closing lows is a loss of 2.3%. The S&P 500 closed this year's third quarter at 815.28, a 2.3% loss would equate to a close of 796.53 (the low close of July 23 was 797.70). A re-creation of the worst October closing loss (-5.66% in 1998) would equate to a close of 769.14. All but one of the October lows occurred by or on the sixth trade day into the month. Tuesday, Oct. 8, is the sixth trade day of October.
Many mutual funds end their fiscal year in October and with another down year coming into October, there could be tax loss selling by the mutual funds.
October has a reputation of being a bear killer (meaning some big bear markets have ended in October), prices can push lower in the beginning of the month and then rebound in the second half of the month.
Support: I have reviewed intraday price activity for the S&P 500 from July 24. There is a small pocket of support at 785-775. The next layer of support (from daily charts dating from April, 1997) is 771-733; there is a concentration of price action in the 763-747 area.
The Nasdaq has moved to new lows for this bear market. I had to travel all the way back to August, 1996, to find support levels. The Nasdaq is inside a band of support at 1154-1118, inside this band is a focus of support at 1138-1125. The next layer of support under 1118 is 1082-1017. I do not think that this level can be tested in the current downleg. I think we would have to have some sort of an oversold bounce before prices for the Nasdaq can close below 1118 to open downside risk for prints 1082-1017.
I do not know what headlines will greet the market on Monday morning, but we are reaching short-term oversold conditions and a rebound in prices could happen at anytime. President Bush is apparently going to address the nation on Monday evening and there could be real hesitation to commit to the long side ahead of that speech. If the Nasdaq prints under 1118, near 1100 anytime in the next two trade days, the rubber band of price will have been stretched to levels which usually force rebounds in price. The same level for the S&P 500 would be prints under about 770. One of the reasons why these price levels might spark a rebound from oversold is that short side traders will probably be unable to contain themselves and they might move in a group to cover open short positions.
Resistance: Immediate intraday resistance for the S&P 500 is 812-828, then 835-856.60.
Immediate resistances for the Nasdaq are 1164-1184.56, then 1195-1222 and 1206-1240, which makes 1206-1222 a focus.
Cherney is chief market analyst for Standard & Poor's