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Will this pattern play out again?

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Stocks opened higher on Monday but was a bit of a struggle after that initial morning rally, particularly for the small caps which ended down on the day. The Dow ended the day with a respectable 68-point gain, but the S&P nearly didn't make it back to positive territory after dipping into the red just before the close.

Daily TSP Funds Return


Having been up about 4% in less than two weeks, it's not a shock to see a little battle fatigue for the bulls. You'll hear people say - and I am guilty of saying this too - that the easy money has already been made on the short-term cycle off the support levels from a couple of weeks ago. Now things may get a little tougher as we test areas of resistance as we've pointed out in our commentary over the last couple of days.

I'm watching this chart to see if the pattern that we saw three other times this year will unfold again. The gap up and big rally on Thursday makes it a good candidate to be #4, and yesterday's negative reversal kept the pattern going. It is also at the top of that large bear flag, but whether that is still viable remains to be seen. It's getting a little long.






The S&P 500 / C-fund nearly filled that open gap from back in March yesterday, but it backed off just before it could do so. Open gaps are very rare on the S&P index chart but we actually have four current open officially on this 4-month chart, which is highly unusual. One is just below near 2700, and there are two others above the gap that was nearly filled yesterday. If we ever get new highs on the S&P, which obviously will happen at some point, then all of the overhead gaps will get filled in the process, so perhaps a little pullback here to fill that small gap near 2700 would make for some tidying on the chart. I don't know what will happen in the interim, but because open gaps are so rare on the S&P chart, getting them filled keeps us from looking over our shoulder, so how about we just get it done this week?




The Russell 2000 small cap index nearly hit a new high yesterday before pulling back. Double tops like this are common and a pullback of some sort would not be overly negative since it is so common, although that doesn't mean it won't drop hard from here, but it's just normal to see double top pullbacks and they can be mild.




Our S-fund is not really a small cap fund, but rather a mixture of small and mid-cap stocks so it tends to do something in between what the Russell 2000 and the S&P 500 are doing, and that's what we're seeing. It isn't as close to all time highs as the Russell, but it is outperforming the S&P 500 recently. It is having a sort of double top test right here, it's just that it's a descending resistance line right now.




The Dow Transportation Index almost hit the top of its recent range before starting to pullback yesterday.




The EAFE / I-fund also hit some resistance so we'll see if it has any strength left today to break through, or if it will be heading back into the channel.




The AGG (Bonds / F-fund) was down again and now testing the lower area of the bear flag again. The last breakdown from the flag was a fake-out, but can it survive another test?




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

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&P 500 (C Fund)
S&P 500 INDEX,RTH (^GSPC)
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)
Source: https://finance.google.com/finance