Market panics tend to occur when the underlying technicals of a market are weakening and the fundamental reasons for investing are deteriorating.

This bull market that started on March 20th, of 2020 has been advanced on a tremendous level of liquidity ($120 billion / month) from the Federal Reserve which backstopped the Treasury’s insatiable demand for cash to fund the huge and ever-growing pandemic induced deficits of Congress.

The underlying technicals of the equity markets appear to have changed and the advance has narrowed. Fewer and fewer stocks are participating. And now the underlying fundamentals are about to change as the tapering of Quantitative Easing or QE is on the investment horizon. Even though the tapering of purchases Treasury and mortgage-backed securities by the Fed has yet to occur, bond traders are not waiting, bond prices are falling and interest rates are moving higher. The calculus for equity valuation for “QE infinity” is now facing a finite timeline and a wind down by mid-2022.

As many know, September and October are both seasonally weak months, but October has a worse reputation than September for the notable market panics that have occurred over the last century.

This brings us to the subject of a potential panicky market break occurring this October. As stated, the technicals and the fundamentals are changing and the buy the dip crowd is now less certain than it was a year ago. Markets appear to have topped. The DJIA topped first on August 16, the S&P 500 on September 2nd, and the NDX 100 and NASDAQ composite on September 7th.

We can use these dates to determine a time window for a potential period of instability that might result in a panicky market break. The famous early 20th-century market technician and trader WD Gann observed market panics tend to occur in a window of 49 to 55 calendar days from a high of a market. He based this on what he gleaned from the Bible.

“7 is the fatal number referred to many times in the Bible…..Seven times seven is 49….” WD Gann

So, if we take the market high of the DJIA on August 16th then count out 49 to 55 calendar days, it gives a potential panic window of October 4 to 10.

If we take the high of the S&P 500 of September 2 the window would be October 21st to the 27th.

And finally, if we use the high date for the NDX 100 and NASDAQ composite of September 7th the window is October 26th to November 1st.

Approaching these dates in time, we as traders and investors should be ready to take advantage of this foreknowledge of potential panic zones.
Market prediction is a tough game where many can be caught off guard or are plain out wrong on the call. But we can use the methods that have proven themselves in the past to look for an edge. The technique of using a window of 49 to 55 days off a high in the market backed up by observation in the moment can add to a successful strategy based on the underlying fundamentals and technicals.

Be wary, stay nimble, and stay safe.

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