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Technical Analysis: October Flexes Its Muscles

As we noted a week ago, caution was warranted through October 29, and the market is so far proving that observation correct. Investors Intelligence bulls-bears have hit nosebleed levels of 62-19, but commercial futures traders remain long the big S&P futures contract, so we have a mixed picture in sentiment, but one that could stand a refresher. Hopefully this pullback will do that just in time for the strongest months of the year, which begin at the end of the month. On the plus side, today's overwhelming downside volume could provide fuel for a near-term bounce.

The S&P and Nasdaq (first two charts below) continue to wrestle with some very important long-term resistance levels, and so far they've shown that they're not up to the task. Perhaps year-end buying will change that, but it's equally likely that it could produce a top of some significance.

The S&P has major support at 1496-1497 — below that and the 200-day average at 1477 (and rising) could come into play. To the upside, it would take a move to about 1535 to break the index's downtrend.

The Nasdaq ended the day at 2725 support; next up is 2700, 2675 and 2650, and 2755 is first resistance. The Dow (third chart) is another index right at major support (13,494). Below that, 13,400 and 13,200 are possible supports, while 13,560 and 13,800 are resistance.

With the banks and chips leading the way lower (charts four and five), bond traders (sixth chart) have begun to price in another Fed rate cut or two at the end of the month. And with good reason.

Paul Shread is a Chartered Market Technician (CMT) and member of the Market Technicians Association.