October 2022 was the largest single monthly increase in the Dow Jones Industrial Average since 1976. It’s been 46 years since the Dow has seen that kind of monthly run. I was a carefree Junior in high school when that happened. After a painful year of market performance, fueled by Russia’s invasion of Ukraine, rising inflation, supply chain issues and a pandemic hangover, the markets started reversing back to the upside. It wasn’t just the Dow that enjoyed success. The Russell 2000, which follows 2000 small-cap and mid-cap stocks also roared, gaining over 11% on the month. The Russell 2000 is thought by some experts to be one of the best barometers of economic health because it is a better representation of corporations across the board and is not just a representation of a handful of industry giants. The S&P 500 notched an 8.9% gain and the tech-heavy Nasdaq lagged with a 5.2% gain (source: Investing.com). The runup in the markets was welcome after 3 quarters of steady declines. All markets are still down on the year, so what’s next for the Dow? From a technical perspective, let’s take a look at the daily chart first. This is a Daily Chart, where each candlestick represents one day of trading activity. The thick red line is the 200 Simple Moving Average, which reflects the average price of a financial instrument over the past 200 days, or 40 weeks. It can be a very powerful indicator for support or resistance. Watch what happens when price toughes the 200 SMA. In recent months, the 200 SMA has held solidly as resistance, and price moved back down. Notice that the stochastic oscillator on the bottom of the chart was at or above the 80 line, suggesting that the market was very overbought, and it was time for a cooling off period. Will the markets cool off in November? Anything is possible, but there are multiple reasons why this could happen:
- The Fed will be announcing a probable .75 point rate hike in November, followed by a possible .50 point rate hike in December to tamp down inflation. While these expectations are priced into the markets, any deviation in Fed policy could send shock waves through the markets.
- The RSI and many other oscillators are showing the markets to be extremely overbought on the daily charts.
- The Bond markets have been fueling the markets but are showing signs of cooling off.
In the short term, a correction or pullback could happen, as has been demonstrated in the past. But what about the medium to long term? Let’s switch to the monthly charts, where each bar represents one month of trading activity. This is all about perspective. The monthly charts give you a mile-high view of the markets over time. From this view, the 50 SMA, which measures the average price over the past 50 months, has held up strongly as support. If you have a picture, or longer-term horizon, this chart shows how resilient markets can be over time. Notice how the October 2022 candle is the biggest candle on the chart, challenged only by April 2022, when it looked like we would finally get through Covid.
Things to Keep in Mind
The purpose of this article is to provide a perspective to what has been happening in the markets. Past performance certainly doesn’t guarantee future results. These are uncertain and sometimes scary times we are living in. Any major geopolitical event could jolt the markets. In the long run, markets have always proven to be resilient. In the meantime, trade wisely.
Tuesday Closing Bell, November 1 (4 PM ET)
|DJIA||32,650.83 -82.12 (-0.25%)|
|S&P 500||3,856.02 -15.97 (-0.41%)|
|NASDAQ||10,890.85 -97.30 (-0.89%)|
|Russell 2000||1851.88 +5.01 (+0.27%)|
|Crude Oil||88.33 +1.78 (+1.92%)|
|US Dollar Index||111.440 +0.015 (+0.01%)|