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The DC chaos has actually created normal patterns

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It was an interesting week for stocks as politics has become one of the major catalysts for a market looking for a catalyst. The Dow jumped 142-points on Friday after Thursday's reversal off of the recent lows. It was solid gains across the board but some overhead resistance and another late story out of D.C. pushed stocks off their intraday highs into the close.

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The back and forth in Washington continues and while it feels like chaos, the charts have actually shown some normal behavior from some familiar formations. We saw large gaps get filled, "F" flags breakdown, breakouts coming back to successfully test old resistance, and some high volume reversals. It's all pretty normal stuff.


With those large post French election gaps on the S&P 500 Index now filled, I'll go back to the SPY chart. I'm not sure why the SPY chart didn't show that one large gap from April because I use the SPY for it's normally more "usable" chart formations. Anyway, as for the SPY (S&P 500 / C-fund) .... back on April 24 we looked at the inverted head and shoulders pattern and the initial target after the breakout was about 240, which is where the recent rally stalled. Then we saw a pullback to the neckline, which is a classic technical move for a head and shoulders pattern, and it held. The action looks fine, except without new highs in the coming days, the technical picture remains questionable and this bounce may not last.




It's a little lopsided, but the action has been almost textbook. Now we have an open gap that needs filled on the upside and that's when it will get interesting again. From there new highs need to be made or the bears will move in and pounce on any tentative action from the bulls at those levels, which have been a struggle thus far, but it has been a pretty good consolidation and basing action on the chart since the March 1 high.


The weekly chart filled that rare open gap last week and so far has successfully tested the top of the bull flag and reversed giving it a positive reversal week. It looks good, but new highs are a must here.




Volume spiked last week and that tends to be a turning point for stocks, whether topping or bottoming.




The DWCPF (S-fund) closed well off its intraday high after partially filling its overhead gap and briefly moving back above the 50-day EMA before the late pullback. Technically there is some work still to be done here since it remains below some key support levels.




The Dow Transportation Index broke down from its large bear flag last week. The downside target of a breakdown is very bullish, but it seems to have found at least some temporary relief and support at the important 200-day EMA. This is the one chart that bugs me the most. That bear flag looks pretty formidable so the 200 EMA must hold.




The EFA (EAFE Index / I-fund) made another new high as the European markets continue to shine, but as important, the dollar continues to decline helping the I-fund. If we see a rebound in the dollar I would look for that short-term rising channel to break and at least make an attempt at heading toward the open gaps below.




The dollar ETF UUP has broken down from that wedge-like trading channel and we saw 4 new gaps open on the way down. This is why I would not be surprised to see a relief rally here.




The AGG (Bonds / F-fund) has remained surprisingly buoyant while stocks were rallying last week. I'm not sure what to make of that but it sounds like the more savvy bond traders are not trusting the rally in stocks, or are expecting some weaker economic numbers to come out. We get a GDP report later this week, so that may tell us something.




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


Tom Crowley


Posted daily at www.tsptalk.com/comments.php


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S&P500 (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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