Goldilocks reversal
by
, 07-14-2016 at 01:22 AM (1254 Views)
Stocks were mixed yesterday as we saw several reversals from Tuesday's Goldilocks day that we talked about in yesterday's commentary. The Dow gained 24-points, the S&P 500 was flat, while the Nasdaq and small caps were down modestly. With stocks closing somewhere between the intraday highs and the intraday low, it tells us that there is some profit taking going on, but also dip buying.
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So stocks held up pretty well while we saw reversals in gold, bonds, and oil. Nothing dramatic, but oil did give back all of Tuesday's gains and is sitting vulnerably just above the 200-day EMA.
If this rally is going to continue it will feed off of the underinvested, and for that to happen it can't go straight up. The underinvested are looking for dips to buy so the best case scenario is to see a few days to the upside, followed by a day or two to the downside, then repeat. If it goes straight up support becomes thin and the indices will get vulnerable, so yesterday's action was on the healthy side despite some losses.
We saw a healthy rally like this off the February lows where we had a sharp move higher, and it even had a breakaway gap like we saw in late June, followed by two months of two steps forward - one step back, before the trend finally broke in late April.
The SPY (S&P 500 / C-Fund) was flat after rallying straight up for two weeks. The breakout is a big deal especially now that there have now been 4 closes above the June highs. But if we pull back further and view the large inverted head and shoulders pattern, the upside potential of this breakout could be significant. That doesn't mean stocks go straight up from here - there could be a lot of bumps and bruises along the way - but as long as the S&P 500 remains above that H&S neckline, the trend should remain up and the initial upside target would be in the area of 219 - 223.
The DWCPF (S-fund) was down yesterday but remained above the June high. The angle of incline since the June low is obviously not sustainable, so a more reasonable angle could be the angle of the dashed resistance line off the recent peaks.
The Nasdaq 100 (QQQ) also saw weakness on Wednesday but it held above the April peak. That open gap near 110.50 could be a very likely target on any pullback but like the other indices, it will need to find a more sustainable angle of incline otherwise support gets very thin.
The EFA (I-fund) was down slightly but it was able to hold above the 200-day EMA for a second day.
The AGG (Bonds / F-fund) bounced back after a two-day decline but you can see that it may have just been reaching up to fill that small gap it left open on Tuesday. Oh, and Tuesday's decline did fill that tiny gap (blue) opened on July 1.
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Tom Crowley
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