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Trick or Treat?

Trick-or-treating is a popular tradition for children and adults alike. The yearly festival occurs in many countries in the evening before All Saint’s Day (November 1st) or Halloween. The “treat” is typically some form of candy or sweets. In some cultures, money replaces candy/sweets. The “trick” is often a threat but is often an idle threat if no treat is given.

So, will the stock market receive a trick or a treat this Halloween?


SPX has been stable and steady during the structural bull rally that started in earnest in May 2013. A positive outside month in Oct 2016 led to a healthy rally over the next two years. However, beginning in 2019, the SPX Index has become increasingly volatile as evidenced by three (4) negative outside months (i.e., May 2019, Feb 2020, Sep 2020, and Sep 2021 and by two (2) positive outside months (i.e., Oct 2019 and Mar 2021). This month there is the possibility for a third positive outside month pattern (October 2021).


Why the increase in market volatility via the onsets of outside monthly reversal patterns?


Some will blame it on the uncertainties surrounding the US presidential elections. Others will blame it on once in a hundred-year pandemic, the ensuing global lockdown, and one of the shortest recessions in US history. Many more will point to the excess speculation, lofty evaluation, the rise of the Robinhood traders, proliferation of passive indexed based products (ETFs and index funds). Most recently, investors and traders are focusing on the Fed and central bank monetary policies, namely tapering and interest rate hikes and higher inflation.

This month is turning into another inflection point, once again pitting the bulls against the bears. After confirming a negative outside month during Sep 2021, a potential positive outside month is developing this month (Oct 2021).


It is unusual to see consecutive outside month patterns develop in a critical market index, especially ones that are complete opposites of each other. The negative outside in Sep 2021 favored the bears as they warned at a major market top.


However, a firm close tomorrow (10/29/21) near the top of the Sep/Oct 2021 monthly ranges (4,545.85/4,598,53) confirms a positive outside monthly reversal pattern. It will be the third positive outside months in the past 3-years. Most importantly, the positive outside month pattern negates the previous negative outside month during Sep 2021. A monthly close tomorrow above 4,545.85 also reaffirms another new all-time high and a higher-high pattern, igniting another year-end to early-2022 SPX rally.

On the downside, the Sep/Oct 2021 monthly lows at 4,305.91/4,278.94 and the 10-month ma (4,200) offer critical support. Failure to maintain support here on pullbacks warns of a deep and more extensive SPX downturn to as low as 3,486 to retest the long-term 30-month ma.


Will a positive outside month in SPX by tomorrow be a treat for investors?


Attached below are the intra-month ranges for the SPX Index for Sep and Oct 2021:


September 2021: Low = 4,305.91, High = 4,545.85 and Close = 4,307.54


October 2021: Low = 4,278.94, High = 4,598.53, and Close = 4,596.42



Source: Charts courtesy of StockCharts.com

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