Monday marks the last trading day for October. How the market closes on that day will tell us a lot about where we're headed for the next several months. Longtime readers know I use the 20-month exponential moving average (EMA) to identify bull and bear markets. If the S&P 500 is trading above its 20-month EMA, stocks are in a bull market. If the index is trading below it, the bear is in control. As you can tell from the following chart... last month, the S&P 500 closed below its 20-month EMA...
Even though, according to this chart, stocks entered a bear market at the end of September, I was still willing to buy into the stock market in early October in anticipation of a year-end rally. You see, each of the previous times the S&P broke the line to the downside, stocks always rallied back up to "kiss" the line from below. I expected we'd get that "kiss" this time as well, and it could lead to powerful gains in just a few months. It only took three weeks. Now we're at a critical point again. The S&P 500 is currently trading about 20 points above its 20-month EMA. If it can hold this level until Monday and close above the line, all the stock market weakness of the past few months is likely to turn out to be just another "whipsaw" moment – similar to what we saw last year – and we can look forward to higher stock prices over the next several months. On the other hand, if the S&P 500 closes below its 20-month EMA on Monday, the chart is going to look horrifically similar to the action in 2001 and 2008.
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