Stocks gave up some big early gains on Friday as the sellers of rallies continue to have the upper hand while the indices flirt with testing the recent lows. The Dow held onto a 65-point gain, thanks to a 9% rally in Dow component
Proctor & Gamble. The Nasdaq and particularly the small caps lagged again, while the S&P 500 finished basically flat.
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We're witnessing what appears to be a short-term bottom being created, although it may be a longer-term low, but it's hard to say at this point. But the big drop earlier this month is now being met with some choppy action that we have seen a few times before this year, before the bulls finally held on and we started to rally again.
This possible short-term bottom that is trying to be formed may be part of a larger topping process in the charts, but tops take time to develop and it's tough to say right now. Any ensuing rally off the lows will get you to forget about the topping process, but another round of selling may remind you down the road. For those thinking short-term, there does seem to be enough damage done to hold off any breakdown below the recent lows, but we still could test them. If I'm wrong, it would get pretty ugly.
Even if I'm right, a test of the lows would be tough to swallow since it is about 1.5% to 2% below Friday's close.
This chart shows the process of trying to create a low. We had a "V" low in February, but even that one came back several weeks later to test that low. You can see the other lows were a choppy grind before the S&P finally resumed to the upside. That's what I have been thinking we are in now.
The S&P 500 futures are down about 0.5% as I write this Sunday evening, but in this
volatile environment, that could turn on a dime so it doesn't mean much. A very weak open could be what is needed to wash out any remaining weak holding bulls out there.
The S&P 500 / C-fund has been held down by some descending resistance as it remains in a choppy consolidation near the lows. It closed above the 200-day EMA for a 4th straight day, which is usually a good sign, but it is still right near the average and if it is going to test the lows, that will be taken out again.
The DWCPF (S-fund) has that dreaded "h" formation, and that will either turn out to be a "W" type of double bottom, or another leg lower will start. It is probably due for some relief, but small caps are much more interest rate sensitive than large caps which is why the disparity to the large caps.
The Dow Transportation Index is also flirting with its recent lows and a rising support line. Like the other charts it looks do or die here.
Ditto for the EAFE Index, this one has been in a bear market for quite a while and may also be due for some relief.
The VIX was actually down on Friday but the Dow was up and the S&P was flat so that's not too much of a surprise. It's above the 200-day EMA so nerves are high and that means more volatility is possible, but that's what we'd expect when a low is trying to form.
AGG (bonds / F-fund) slipped again on Friday, remains in a downtrend, and looks bearish, but like anything else, they shouldn't go straight down, although any rallies may have to be sold near resistance.
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