Stock Market Seasonal Patterns

On 09/18/20 the S&P 500 (SPX) broke below 3310.00 which was the second stop loss level for the SPX trade initiated 09/10/20 at SPX 3412.60.  The first stop loss on half the position was at SPX 3327. 00 which resulted in a loss of 1.25%.  The second stop loss level of 3310 was 3.0% below the entry point and resulted in a 1.5% loss on the second half of the position.

Almost all markets have seasonal patterns.  The US stock market is seasonally bearish from late August until mid- October, so stocks could continue to fall for the next few weeks. 

The decline from early September has so far not been uniform, please see the SPX 4-hour chart courtesy of Trading View.

Of the three main US stock indices; S&P 500, Dow Jones Industrial Average (DJI) and Nasdaq Composite (IXIC) the DJI has been the weakest. Since the recent rally began on March 23^rd both the SPX and IXIC have made new all-time highs. The DJI made its rally high on September 3^rd 1.2% below its all-time high.

The DJI September decline low occurred on September 10^th at 27447. On September 11^th with the SPX and IXIC making new decline lows the DJI bottom was 27448 just above it prior day low.  On September 18^th again the SPX and IXIC made new decline lows while the DJI low was 27488,  40 points above its September 11^th bottom.  If the September drop were the beginning of a much larger bear phase you would expect the weakest of the three main stock indices to be leading the way down.

The SPX 4-hour chart further illustrates the bears lack of power.  The Russell 2000 index (RUT) is composed of small caps stocks.  Since March 23^rd it’s been much weaker than the three main US stock indices.  At its rally high made on August 11^th it was 6.5% below its all-time high, yet on September 18^th it was holding well above its decline bottom made on September 11^th.   If this were the beginning of a bear market, small cap stocks would likely be significantly below the main indices.

Additional evidence of weakening downside momentum comes from the 4-hour RSI which as of September 18^th had a double bullish divergence. 

While its possible the decline could be complete as of September 18^th , seasonal factors imply prices could go lower.  The next significant Fibonacci support is at SPX 3258 which is a .236 retrace of the March to September rally.  Just above that level is the short-term top made on July 23^rd at 3280, this prior resistance point could become support. 

If a bottom is in place as of September 18^th bearish seasonal  patterns could hold back a near term rally.  Within the next few weeks there could be a move back to, but just above the bottom made on September 18^th.

Evidence suggests the current decline is probably a correction within an ongoing bull trend.  Long-term investors continue to hold all positions.  Short-term traders hold off on any new positions long or short, let’s wait for additional evidence from the stock market.  An update on market conditions will be posted soon.