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Big sell-off, big reversal

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Stocks were down across the board on Thursday and the small caps and Transportation stocks lagged once again. However, some early deep losses were erased and we saw upside intraday reversal patterns on the charts once again. The Dow ended the day down 24-points, well off the 144-point loss we saw near the open.

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Retail got beat up after some strength earlier in the week, and after the bell Nordstrom sold off after reporting their earnings.

Oil was up again, and copper rallied but created a negative reversal day pattern.

Investors are still showing their desire to buy the dips and we've seen two strong sell offs in the last week or so, particularly in the small caps, get bought as it tested the 50-day EMA. The energy from investors hasn't been strong but the bulls are still lurking waiting for opportunities.

The S&P 500 / C-fund lost 0.22% on Thursday but it had been down much more earlier in the day, and what I said in Wednesday's commentary may have just played out. I said, "clearly investors haven't been overly anxious to buy into the recent test of new highs. Perhaps it needs another shakeup to bring in new money?" Yesterday seemed to be a shakeup and the opportunity they've wanted. Except for the double top pause, this chart still looks fine, but some others don't look as good.

The DWCPF (S-fund) broke down sharply from its bear flag on Thursday, but just as quickly it rallied back into that flag pattern after retesting the 50-day EMA. As I mentioned on Tuesday, "...that powerful reversal last week at the 50-day EMA may be a place where the bulls made their stand and will be buyers again should it be tested again." But it's still in a bear flag so let's see how willing they are to buy if it moves back to the top of the flag.

The Russell 2000 small cap index shows similar double reversals that have led to lows going forward, but we can't ignore the bear flag yet. They are still one of the more reliable chart formations.

The Dow Transportation Index did what it was supposed to do while in a bear flag, and that is to breakdown. It also reversed right back up after hitting the bottom of the large bear flag. I would think that the 50-day EMA will be tough to cross back over at this point.

The EFA (EAFE Index / I-fund) dipped below that old resistance line, turned support. So now what? Will it be as easy to get back above it as the last time? I do see some very good looking charts in Europe, but they are also quite extended.

The AGG (Bonds / F-fund) tested the 50-day EMA again, and like the small caps and Transports, it is finding support after breaking down from a bear flag. Very interesting set ups.

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Thanks for reading. Have a great weekend!

Tom Crowley

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S&P 500 (C Fund)
DWCPF (S Fund)
Dow Jones U.S. Completion Total Stock Market Index (^DWCPF)
EFA (I Fund)
iShares MSCI EAFE Index (EFA)
AGG (F Fund)
iShares Lehman Aggregate Bond (AGG)