TSP Talk Blog

Stocks opened higher on another mostly quiet day on Wall Street, volume-wise. They peaked about 11 AM ET as Janet Yellen was speaking, but faded the rest of the day as new polls regarding the Brexit vote hit the wire and they favored Britain leaving the EU. The Dow ended the day down 49-points.

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The polling has been rather tight, and the "Leave" side actually took a small lead in some recent polls, which is why stocks reversed down yesterday. Then, about an hour after the close, stock futures rallied on more polling showing 48% "Stay", 42% "Leave". The gambling community still has the "Stay" side as a 3 to1 favorite. Isn't this fun? It kind of reminds me of the debt ceiling votes we had in congress several years ago when the market was hanging on every vote. We know there will be a gap open tomorrow, but in which direction?

Here's the breakdown of the Brexit referendum timeline:

- At 2 AM ET on Thursday the polls open

- 5 PM ET the polls close

- 7:30 PM ET first results start to come in

- 3 AM ET on Friday morning, the final results will be announced

Bottom line, investors are expecting the worst for stocks if the "Leave" side wins the vote. Should the "Stay" side win, we could see a pop up on the news, but I wouldn't be surprised if there was profit taking pretty quickly, whether the same day or a in the coming days. But who knows? The fear seems to be in the air, and a "Stay" vote may be a major relief that could trigger another leg higher. Whatever it is, there are risks.

I've got a lot of charts to show you below, but right now I don't know if technical analysis is helping or distracting. The short-term charts look OK, but we've seen some recent negative reversals. Some of the weekly charts look poor and that could mean trouble, but not necessarily in the next few days or weeks. It may or may not take a while for that longer term analysis to play out.

The S&P 500 (C-Fund) put in a second negative reversal day of the week, and that has been caused by some intraday Brexit polling. I don't know what will happen, but the book makers still have the "Stay" side well ahead, so perhaps the polling is just emotional noise. Either way the negative reversals show up on the charts and they are somewhat concerning. There is an open gap both above and below the current levels.




The Weekly chart of the S&P 500 probably looks the best out of all of them, but there is still some concern that the bearish head and shoulders pattern (red) is still in the process of testing the head before another leg down. Or, we could look at the blue inverted head and shoulders pattern and potentially see a breakout to the upside.




The DWCPF (S-fund) is risking making a lower high after pulling back from Monday's high. But it could also be a bull flag forming, which tend to break to the upside, and that's what a "stay" vote in the Brexit could do.




The Weekly chart of the small caps Russell 2000 Index shows some clear problems with a possible lower high forming. It is above the 50-week moving average after a major rally off the February lows, but lower highs and lower lows is not a good trend if that negative reversal candlestick ends up holding.




The Weekly chart of the Dow Transportation Index is also in a long-term downtrend having peaked in 2014. It's possible that the large inverted head and shoulders pattern will break to the upside, but until it gets back above that that descending neckline, the bears may be in control.




The EFA (I-fund) was basically flat yesterday after running up a long way from the recent lows. There's a mid-sized open gap above, and another big one below that could each vie for attention, but clearly the Brexit vote will determine which way this goes.



The London FTSE revered down yesterday, but that was on the unfavorable polling that came out on the Brexit. It has also come a long way in a short time after regaining all of the early June losses.




Here's a longer-term look at the FTSE and you can see the major downtrend and that it is nearing some descending resistance now.




The dollar has resumed its downside action since filling the recent over head gaps.




Not surprisingly, the Volatility Index has risen sharply in front of the Brexit vote, and it actually closed at its highest level since last February. This shows there is fear in the air and buying protection has gotten expensive. The next couple of days could see this move wildly - but in which direction?




The AGG (Bonds / F-fund) was up and is trying to find some support at the 20-day EMA, but it remains in a short-term downtrend while trading in a longer-term rising channel. Bonds and currencies will also be very volatile after the Brexit vote.




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

Tom Crowley


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