TSP Talk Blog

Stocks gapped up at Monday's open and trended higher all day closing near the highs. The Dow gained 304-points on the day and we saw gains at or near 2% across the board. Volume was surprisingly unimpressive.

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Normally an emotional Monday morning gap up would quickly get filled, but the bulls were falling over themselves to get a piece of the action, so there is still an open gap on the charts. This looks like great action, but of course it may not be as easy as it appears now, as I will show you below, although this action is a lot more bullish now than it was a week ago.

The SPY (S&P 500 / C-fund) gapped up so there is an open gap near 195.00. If the upside continues it could turn out to be a "runaway gap" that doesn't get filled, but we know gaps tend to get filled so that would be rare. We can't rule out this being a big bear flag either. There is a ton of resistance overhead and breaking through would be a huge plus technically.


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

The Dow Completion Index (small caps / S-Fund) also gapped up and may have officially broken to the upside of the smaller bear flag but it is now up against some possible resistance (dashed) if we ignore the FOMC fake-out rally in mid-September. Otherwise, the 50-day EMA and the descending resistance line off the FOMC peak is closer to 1040 in which case there would be some room to run.


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

Take a look at this chart that shows a very similar apparent successful test of the lows and a strong rally (that's actually a 21% rally off the lows) and on that last day it gained 3.4%. But the next chart shows what happened after that day in 2008. That's a 26% decline just 2+ weeks later.


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

That of course was the financial crisis and right now the market environment is a far cry from that situation, but it's an exaggerated similarity to get your attention that a few big days does not necessarily mean the bear market is behind us. It could be, but the market may not make it that easy for the bulls.

The EFA (EAFE Index / I-fund) is always full of gaps because of the overnight trading, and yesterday's rally nearly filled the open gap from post FOMC day, and opened a new gap near 58.5. Getting above the bottom of that flag support line is a good move, but that is kind of a clumsy flag formation and we can probably draw it a number of different ways. The 50-day EMA is next to be tested.


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

The AGG (bonds / F-fund) hit the overhead resistance on Friday and has since pulled back sharply. It is now back below the neckline of that inverted head and shoulders pattern. This is back to neutral for bonds although the trend is still up.


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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