BTFDs have crashed the bear party yet again, after swooping to buy the early-October lows and driving the index to new all-time highs this past week.
The 09/02 through 10/04 correction that preceded the rally of the past two weeks was the first correction of > -5% for the benchmark S&P 500 ETF (SPY) since October 2020.
Historically speaking, this was one of the longest stretches in history that the S&P 500 went without a correction of 5% or more.
When put into context, though, a -5% correction is rather small, and many market participants were looking for a larger decline that approached closer to -10%.
Throughout history, when the broader market has witnessed smaller than expected corrections, sharp rebounds similar to what we’ve seen from the S&P 500 these past two weeks have occurred.
More often than not, what has been one of the key ingredients in the formation of these rebounds? Fear of missing out (FOMO).
In environments such as this, finding trades might be more difficult than you initially think, as shares of many good companies have already taken off.
I get it… watching a trade run without you is always tough.
In times like this, you must control your emotions and remember that stocks mean revert (i.e., correct lower in uptrends and correct higher in downtrends).
Therefore, patience should be rewarded for traders willing to wait to buy during pullbacks.
As I am about to show you, however, this is the time of year when the potential for the market to get away from us is this heist it is all year.
Is the market’s seasonal pattern about to spark a market melt-up?
From a “seasonal standpoint,” the stock market is nearing what is typically the strongest period of the year.
This is all thanks to the upcoming holiday season, where we expect to see spending rise on things such as food and discretionary consumer goods, which should boost corporate earnings across various industries.
Figure 1 directly below shows this tendency, in the form of the S&P 500’s average monthly performance over the past 20 years.
As you can see, this pattern is right at the point where it usually starts to rise very rapidly.
Again, though, this is an average of what has occurred over the past 20 years, and nothing is guaranteed in trading.
If this pattern is going to play out in a traditional manner this year, and if I want to ride these seasonal tailwinds as close to year-end as possible, I want to find a stock that has the technical potential to carry higher not just for the next few days, but for the next few weeks.
One stock that looks to have this potential after a very bullish development this week is Olin Corporation (OLN).
Yahoo Finance gives OLIN Corporation the following description:
Olin Corporation manufactures and distributes chemical products in the United States, Europe, and internationally. It operates through three segments: Chlor Alkali Products and Vinyls; Epoxy; and Winchester. The Chlor Alkali Products and Vinyls segment offers chlorine and caustic soda, ethylene dichloride and vinyl chloride monomers, methyl chloride, methylene chloride, chloroform, carbon tetrachloride, perchloroethylene, trichloroethylene, hydrochloric acid, hydrogen, bleach products, potassium hydroxide, chlorinated organics intermediates and solvents, and sodium hypochlorite. The Epoxy segment provides epoxy materials and precursors, including aromatics, such as acetone, bisphenol, cumene, and phenol, as well as allyl chloride, epichlorohydrin, and glycerin used for the manufacturers of polymers, resins and other plastic materials, water purification, and pesticides; liquid and solid epoxy resins that are used in adhesives, paints and coatings, composites, and flooring; and converted epoxy resins and additives for use in electrical laminates, paints and coatings, wind blades, electronics, and construction. The Winchester segment offers sporting ammunition products, including shotshells, small caliber centerfire, and rimfire ammunition products for hunters and recreational shooters, and law enforcement agencies; small caliber military ammunition products for use in infantry and mounted weapons; and industrial products comprising gauge loads and powder-actuated tool loads for maintenance applications in power and concrete industries, and powder-actuated tools in construction industry. The company markets its products through its sales force, as well as directly to various industrial customers, mass merchants, retailers, wholesalers, other distributors, and the U.S. Government and its prime contractors. Olin Corporation was founded in 1892 and is based in Clayton, Missouri.
Take one look at Figure 2 and you’ll see why I like the longer-term potential.
That’s right, in addition to being in an industry that is just starting to show leadership vs. the broader market after several months of underperformance, Figure 2 shows that OLN’s rally out of a beautiful consolidation pattern on Friday provides the technical potential for much higher prices from here, near $62/share.
The potential for seasonal strength to kick in soon, along with OLN’s post-breakout target of $62/share, and newly developing leadership vs. the S&P 500 from OLN’s industry (specialty chemicals) all combine to provide favorable odds that OLN can at least reach its initial target of $62.
At the same time, though, I am trying to teach you to be patient and to not always want to chase trades. OLN would be a much more interesting buy to a patient trader if the stock were to pull back and retrace some of Friday’s outsized rally. In cases like this, it is not uncommon for the stock to retrace its footsteps and retest the breakout area.
Therefore, I’d be more interested if the stock were to retrace down to one of my favorite short-term moving averages, the 13-day moving average shown on Figure 2.