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In a perfect world...

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In a perfect world, yesterday's losses were just part of the script we've been seeing unfold, but the 190-point decline in the Dow and 1% plus losses in the major indices were a little more than we may have wanted to see in our perfect world scenario.

Daily TSP Funds Return

The I-fund lagged as the dollar gapped up higher yet again on Tuesday. Bonds had a big day.

The pre/post holiday reversals may have been postponed a day because, as we talked about yesterday, sometimes the day after a major holiday isn't exactly post-holiday yet and we get a holiday hangover. Well, in a perfect world, that's what happened yesterday.

We've been looking at the cup and handle formation on the SPY (S&P500 / C-fund) and in a perfect world yesterday's decline would have found support at the cup and handle's old support line.


Of course a chart is never perfect and perhaps the C&H is a little choppy and lopsided, but you get the idea. The old resistance line on the C&H would be near 211 and yesterday that level was penetrated fairly significantly but it closed nearby at 210.70 and the SPY nearly tested the 50-day EMA in the process. Maybe it's trying to kill two birds with one stone.


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


So, in a perfect world that old resistance would have held as support, and in a perfect world the day after the Memorial Day would be down slightly instead of over 1%. And if that perfect world scenario were to continue, we'd see some stabilization today followed by a couple of strong days to end the week where the dip buyers show up as they stagger back from their long weekend vacations.



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


But alas, it's not a perfect world and we just hope that it rhymes with our scenario to some extend.

The
Wilshire 4500 (S-fund) lost 0.92% but managed to close above the 50-day EMA after briefly falling below it.


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


The Dow Transportation Index did break down from its head and shoulders pattern, which is what H&S patterns tend to do while in a downtrend. Our only question was whether it would behave like an H&S in a bull market where the neckline holds and it continues higher, but that wasn't the case. The recent downtrend was too much for it to take. Now the question is, what does this mean for the other indices?


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


The
EFA (EAFE index / I-fund) was pounded on Tuesday because the dollar continued to rally.


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


I had expected some of the reversals that we saw last week, like the rebound in the dollar, to reverse back down after the holiday. Instead we saw another gap up and now I'm wondering whether it's the holiday hangover thing, or if the dollar is actually bottoming. Those three big gaps below are going to be tough to ignore and I can't believe the dollar can go too much higher without at least trying to back and fill them.



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


The AGG (bonds / F-fund) benefitted from the weakness in stocks putting in a nice day and gaining 0.25% (the F-fund was up 041%). So far the rebound hasn't made any bullish technical moves, but it has held at the 200-day EMA twice, and that's a plus for bonds. But the real work is yet to come.



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



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


Tom Crowley


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