20 / 50

Stocks rebounded early on Friday, but the rally ran out of steam rather quickly as the day's high was reach just minutes after the opening bell.  For the rest of the day we saw flat to lower action as investors seemed reluctant to do much before the weekend with uncertainty filling the news headlines.

                                  

The S&P 500 chart below looks like a mess, but I wanted to see if I was missing any obvious developments.  At first glance we can see that our short-term trends have been broken, but the intermediate and longer-term trends are still hanging on.  I don't like the formations I'm seeing, but I do see a lot of support levels that could save the index.

The index is trading below the 20 and 50-day EMA (negative) but the 20-day EMA is still above the 50-day (positive), and both are above the 200-day EMA (positive.)  By definition that means we are still in a bull market, but we seem to be in a new short-term down trend.
                     
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The 20-day EMA is moving down and is close to testing the 50-day EMA.  If the 20-day EMA crosses the 50-day, it could mean a couple of things, but it doesn't make our jobs any easier.

Sometimes pullbacks become oversold at the 20/50 crossing and it could be the end of a pullback and the start of a move higher.  On the other hand, most market crashes are preceded by a crossing of the 20 below the 50.

In 1987 we saw both.  In May of '87 the 20 just barely dipped below the 50, the pullback ended and the Dow moved to new highs, rallying about 25% over the next 3-months. 

Then we saw an almost identical topping formation starting in August of '87 and when the 20 crossed below the 50, it was a great time to sell as it would have gotten you out just days before the crash.
                        
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

So how do you know when the market is going to rebound and when it is going to crash after a 20/50 crossing?  You don't.  But selling was the safe move.  Should you be wrong and the market heads up, you lost some potential gains, but you did not lose money.

Had you held on both times you were lucky enough to catch the early gains of the May rally, but you would have been hurt badly in October. 

Moral?  Better safe than sorry.  Our problem comes with the trading limits as we could sell using our last IFT of the month, and miss big gains.  Frustrating.

The Dow Transportation Index is showing mixed signals but the bearish case is strong enough to take the, "better safe than sorry" approach.  The 20-day EMA is below the 50-day and so far we have seen a bounce.  The key will be whether the index can move above those two EMA's and break to the upside of the green triangle formation. 

                        
                        Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The breakdown from the big bear flag (red) is the Achilles Heal here.  This is a dangerous formation so we will have to see which way this plays out.  Being the leader, we'd expect the S&P 500 to follow along, whichever direction the Transports take.

I continue to sell slowly (add to G-fund) into the recent rebound and will likely do so until I see evidence that the rally can break through resistance. 

The TSP Talk Sentiment Survey System gave another buy signal for this week after the 0.75 to 1 bulls (39%) to bears (52%) ratio. The system's allocation remains 100% S-Fund.

Thanks for reading!  We'll see you back here tomorrow.

Tom Crowley