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The Road Ahead In October

10/04/11 09:04:27 AM
by Billy Williams

October has been referred to as the "jinx month," but for traders, it can offer spectacular profits if you are prepared.

Security:   NFLX
Position:   Sell

Investors have been struggling to keep their heads above troubled waters as in August, it was recorded that the market had suffered a huge decline in July, where weakness came into full bloom and spilled over into August and traders were advised to have a list of stocks to short as well as a list of strong stocks to go long if the market turned. In either case, you would be ready and, in the case of September, the shorts took control of the market.

September 2010 gave up another 100 points on the Standard & Poor's 500 and no sectors were spared, not even gold or precious metals. The fears of another debt contagion spreading throughout Europe and winding up on the shores of the US and elsewhere caused investors to give up the ghost and sell in one massive rally, one after another. See Figure 1.

FIGURE 1: NFLX. September was a month of extreme weakness, where stocks like NFLX offered bears easy setups like at this price point where price began its bearish trend. October stands to continue the downtrend and the potential for another market crash similar to October 1987.
Graphic provided by:
Gold, which had been a refuge from risk, has also taken a blow but not to the extent as other markets, and it is believed that it is temporary. In fact, it is possible that gold and precious markets were taken down in price by the various central banks in order to prevent a mass exit from currencies to gold or at least slow it down. A large central bank has the ability to manipulate the price of a market due to its sheer financial power, but only for a short while.

In time, gold and other precious metals could resume their uptrends as time goes by.

Equities are a different matter altogether. Now, the bears have control of the market and things are setting up for another down move. October has historically been the month where the markets have crashed and the stage has been set for that to occur again with the minor EU partners -- Portugal, Spain, Italy, Ireland, and Greece -- all experiencing a high burn rate on the cash they received from the various European bailouts.

"The Stock Trader's Almanac" refers to October as the "jinx month" because of crashes in 1929, 1987, the 554-point drop on October 27, 1997, back-to-back massacres in 1978 and 1979, "Friday the 13th" in 1989, and the meltdown in 2008.

In a short while, Greece will be without cash and the others could follow the same path quickly, which could result in a panic and spark another 1987-type crash that occurred here in the US.

Already high-flying stocks such as Netflix, First Cash Financial Services, Royal Gold,, and others are beginning to break down and could experience price reversals.

According to "Investor's Business Daily," the number of new lows achieved by stocks are exceeding new highs at a spectacular rate and worries on Wall Street begin to rise as the specter of a second recession looms over the horizon of a new year as 2012 approaches.

Recent speeches by both the Fed chief, European heads of state, and the US President are not having the impact that they had hoped as jobless claims mount and a pending debt crisis is approaching Wall Street like a train headed for a direct collision.

This is where traders have the edge, because they are able to ride both sides of the trend -- bullish or bearish -- and achieve profits while investors must suffer through each successive decline.

With October beginning, the bears have the edge in a month that is traditionally a month of steep declines and seismic market crashes that are felt globally. Assemble your list of shorts because downward moves are traditionally explosive, but the profit potential is enormous. Use puts to control risk while maximizing profit potential through leverage, but time your trades so you don't suffer the ill-effects of time decay.

October stands to be a fast-moving market that favors the downside until price tells you otherwise.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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