Ashraf Laidi: S&P 500 Technical Outlook for October 9, 2012.

16% in 16 weeks. That is the percentage rise in the S&P500 between its June low and year high attained last month. The upcoming US earnings season will offer a mixture of announcements related to earnings/sales/guidance, which will undoubtedly impact market volatility. The picture should reflect a more cautious view towards a cooling global economy.
Looking at the daily and weekly oscillators (focusing on the stochastics), we detect prolonged downside ahead likely to materialise into the remainder of the month. The immediate support stands at 1435, which coincides with the trend line prevailing since June 1^st.

A break below 1430, would pave the way for 1418-19, which is the 55-day moving average. Recall, the 55-DMA also coincided with the lows in July. But this also raises the question as to whether losses would extend towards the 100-week moving average, the supporting point for the index after breaching below the October trendline (left chart). Currently, the 100-WMA stands around 1308.
A key factor in determining the next trough is to calculate the average peaks-to-troughs in the S&P500. The April-June decline was 11%. This was preceded by a 9% decline in November of last year. A decline from current levels down to the 100-WMA of 1308 would be in the magnitude of 12% from this year’s highs.

Beware of Monthly Technicals
Projecting the outlook beyond 2-3 weeks requires a monthly view of carefully configured oscillators. According to monthly stochastics, the momentum remains positive, suggesting that a decline of a 6%-10% in the coming weeks would be followed by a rebound (possibly a post-US Elections or Santa rally) whose magnitude would retest the year’s highs and possibly 1490s.