Just a few days after the flash crash panic low of August 24th after a 14% correction (intraday) we published “An Oversold Market and the Case for an October Low”. It should have made an impact upon readers displaying the extreme nature of the oversold condition and presented a graphic pattern forecast of how stocks were likely to trade over the next couple of months. The first chart is the exact annotated chart we presented on August 31st. Note the 5 day crash phase, the 3 day rally off the panic low and the 17 day rebound high from that bottom in this chart of 2011.
The chart below is today’s market (August/September 2015) which has the same 5 day panic low, 3 day rebound and 17 day trend into a top very similar to the above 2011 pattern. Not a bad day to day, week to week forecast thus far.
The 2008 panic (below) was far more serious than the 22% and 14% declines of 2011 and 2015. However, this 2008 panic chart pattern that we presented in August and here again has a very similar price movement forecast. Note the panic drop followed by a couple day rebound and an eventual top 17 days after the initial low has again acted like “Groundhog Day”.
While we favor the price action similar to our 2011 chart with more modest new lows in October, it still warrants watching the next couple of weeks to see if prices continue immediately down to the August 2015 intraday lows and lower as occurred in 2008. OR do stock prices (SP 500) stabilize at a higher low as in 2011 over the next couple of days and begin a modest rally phase one last time prior to the potential medium term lows due in October. Many scenarios are possible and these patterns are far from iron clad, however they were presented ahead of time and have provided an interesting rhyming of history that should it continue would favor a more important stock market low around the October 10th to 17th time frame. Any rally to new highs exceeding those in September would imply the significant fear phase had ended and a new pattern beginning.
Another reason prices may find it hard to fall much lower than the 14% correction lows of August comes back to the oversold conditions we mentioned. The chart below shows a rare extreme Put to Call option ratio above 86% while the 10 and 20 day averages almost reached 80. Traders Buy more Puts as prices decline and extreme Put/Call ratios imply stock market lows are near.
The technicals continue to show risk into October, yet the severely oversold levels reached imply that near term declines should be contained in the 10 to 20% correction zone. Fundamentals are notably bleak over the next 3 to 6 months and will remain so as long as commodity prices are in a downtrend. With industrial numbers coming out of China today showing a shrinking production levels, there is a risk of further price valuation shocks.The manufacturing numbers that China revealed today at 47 on the PMI reveal the sharpest contraction mode since early 2009. The modest economic expansion urges by Western economies continue to play a tug of war with contracting emerging markets and that is generating a rising level of fear. Raising interest rates in this environment should be postponed until the Western and Eastern economies can begin to move upward in sync.
For now we will hold more cash for possible equity lows in October and potentially into early 2016 when we suspect commodities will reach another important low point more significant than the early 2015 bottom.