High stakes poker, winner takes all. Traders better have their trade plans ready: The next 3 weeks will likely determine whether we enter a lengthy bear market or whether bulls can use coming positive seasonality to avert a major market break one more time. By the end of October we shall have confirmation one way or the other and I can back up these assertions with charts.

Firstly, a quick recap: Markets surely have not taken kindly to Janet Yellen’s appearances as of late. Both have produced instant reversals. In fact, the $SPX sold off nearly 6% since the Fed’s September announcement not to raise interest rates before seeing a 50 handle ripper overnight rally into Friday morning before reversing yet again. Tricky markets that offer plenty of opportunity for focused traders, but also pose a psychological minefield for most. But principally last week’s weakness should not have been a real surprise to market participants as September seasonality is historically very poor for last week.  Yet, as we are approaching month and quarter end next week, the stakes for this market couldn’t be higher as markets are approaching some very critical milestones that will likely resolve the binary challenge this market faces as we outlined last week in Game Over.

Specifically the time period between now and the end of October is likely to determine whether we are entering a full fledged bear market or whether the bull market can be saved in time for positive year end seasonality. Yes bulls and bears have been playing a high stakes poker game and it is down to the final table and winner takes all.

Let me highlight the key issue. Look at this monthly $SPX chart below. For many months we have been following two specific moving averages the 5EMA and 8MA. Every month, like clockwork, these 2 MA’s have acted as critical support. This support was decidedly broken with the August flash crash. In October 2014 the break was saved into month end. Unless something magical happens this coming week it appears these 2 MAs will not be recaptured by month end. However, that’s not quite the main critical issue.

More relevant is what happens whether the shorter term 5EMA and longer term 20 MA cross over each other:

As you can see these two MA’s are only 9 handles apart from each other now. History shows crossovers are rare and are meaningful with far reaching consequences. The immediate conclusion: Bulls need a rally fast to avoid a crossover. How fast? Since this is a monthly chart it is the monthly closes that matter so the September and October closes will determine the outcome of this high stakes poker game.

If bears want October to be hell for bulls they need to force the crossover by next week’s month end close or October at the latest. And this highlights the stake here: We will either have a break or a save. Winner takes all.

The consequences of a crossover are pretty clear: As we’ve outlined previously the larger macro fibs indicate a market retrace to the 38.2% Fib which coincides with the 2007 highs. Pretty solid confluence.

Supporting such a target is the massive heads and shoulders pattern that has now formed. Indeed the 2020 $SPX highs following the latest FOMC meeting are of note as they match almost precisely the highs of September 2014:

So the lines are pretty clear and they also represent a clear challenge to bears: The monthly MAs need to be crossed and the neckline needs to be broken and STAY broken.

And herein lies also the larger problem for bears: Seasonality. After the middle of October going into November seasonality is turning rather aggressively positive all the way into April as the table below shows (Bespoke Invest):

Tick tock. High stakes poker. In my mind the October 2014 lows need to be broken in the next 3 weeks or it’s game over for bears it seems. Lest not forget that in 2014 the correction ended in the middle of October as well and managed to produce a massive rally through year end:

So as messy as the daily and weekly charts look (see also technical charts September, 27 ,2015), no new lows have been made yet. Not even close. Since the August flash crash we have been stuck in a tradable range. While trend lines and moving averages have been broken, price has not.

So how will this poker game play out? Who holds the better cards?

As outlined above bears are running out of time. This is never a good thing in poker as it increases pressure to produce results and produce results fast.

Yet speaking for bears are the following factors:

The structural breaks on the monthly charts are enormous and are reminiscent of what we saw in 2000 and 2007. On the monthly $OEX chart  the top market cap stocks) the neckline is even better defined:

Unless markets will see a 1998 or 2011 like repeat a break of the neckline will target a move below the 2007 highs.

And history shows we haven’t even seen the beginning of a proper corrective period yet as indicated in the high/lows:

Based on this chart above, so far, this correction has been child’s play to what could yet arise.

Note while indices are just in corrective territory over 70% of stocks are already in a bear market and below their 200 day moving averages:

And herein lies both the opportunity and threat for markets. Will indices catch up to the underlying stocks they are tracking and confirm an actual bear market? My take is only a sustained break of October 2014 lows will answer this question.

Speaking for bulls is that in the past these type of low readings have produced meaningful lows and a meaningful bounce remains a high probability in the days to come.

Markets are also driven by agendas and funds have had a horrific year to far. Month and quarter end mark-ups are common. In fact the broken geometric line index ($XVG) suggests structurally that a bounce is coming:

The 1998 lows produced new market highs while the $XVG made a lower high. In 2008 the bounce was too small to save markets and the crash ensued. For now the $XVG appears to painting a megaphone pattern which certainly opens the possibility of a renewed tag of the lower trend line, but also a move toward the middle Bollinger band.

Supporting bulls also is the that M1 money supply remains high:

While the data is lagging it is the showing money supply data that is well above the October 2014 levels and this fact alone may help explain why the October 2014 lows have not broken. Markets are still very much supported by money supply and central banks. And clearly this hasn’t changed. Anywhere.

This past week we saw several more central banks cutting rates and any notion of rate increases are pipe dreams. Janet Yellen left herself a big out in this week’s speech as well. Basically any “economic surprise” or bad data point and she has an excuse not to raise rates and voices are starting to be heard that she may not even raise rates in 2016.

And here’s another big problem for bears: The Ryder bull/bear ratio continues show that massive selling has already taken place:

Along with the money flow index at the bottom of the chart we see another strong case for a larger bounce in the offing.

As we outlined last week bulls need a 1998 like save or markets face a structural break targeting 2007 highs.

Curiously the recent action in price continues to show a similar structure to 1998 so a spike into month end before renewed selling into October would not surprise:

Incidentally, when did the 1998 correction bottom? October 8.

When did the 2011 correction bottom? October 4.

When did 2014 correction bottom? October 15.

Cute.

So bears. To re-iterate: The monthly MAs need to be crossed and the neckline needs to be broken and STAY broken below October 2014 lows.

And bulls. You absolutely need an October magic show and get back above the daily 200MA (currently 2065) or the jig is up for a long time to come.

We will know who the winner is by the end of October at the latest.

Tick Tock. Place your bets.