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Bears stepping aside again

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Stocks rallied on the day after 9/11 for the first in 5 years. They opened higher and were met with some selling initially, but the dip buyers came in twice and put the bears in their place once again. Despite the weaker seasonality with September's propensity to be a negative month, the Dow gained another 61-points and actually closed a few cents above its old high.

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We seem to be an environment of fully valued markets that have come a long way, but with bonds paying so little these days, investors are still enamored with stocks vying to get that top return. Obviously money managers are always looking to get the most bang for their buck to pad their returns, so it has become a self-perpetuating rally. That is, as long as stocks are rallying they must show their investors that they are in the best performing investments, so they keep buying stocks, keeping the rally alive. Once interest rates start going up that could all change, but who knows anymore when that will happen now the Fed has gotten cold feet again. Janet Yellen seems determined to no let stocks go don on her watch, bubbles be damned.

The sideways consolidation from mid-July to early September seems to have given it enough rejuvenation to push the indices to, or near, new highs, but will they have enough energy to continue that push and, more importantly in the short-term, continue up without filling the open gaps below on many of the charts first?

The SPY (S&P 500 / C-fund) is just blasting through every level of resistance in its way during this week's rally. The next resistance level may be the top of the longer, wider rising trading channel, which is still several points away. But don't forget about the open gap near 247. It took 5 days for the gap opened on August 22 to get filled but that actually marked another buying opportunity.

The DWCPF (small caps / S-fund) led the way with a strong rally, also pushing above resistance but still off its old highs unlike its larger siblings' indices. There's two open gaps on this chart, and while they do tend to get filled, it's the S&P 500 and Dow that don't usually have open gaps for too long.

And here is a chart of the Dow to show that most gaps get filled quickly and this week we got two new ones open. The one from July is still sitting there, surprisingly, and at this point that one won't get filled until this market turns on its head but it will eventually happen - whether its weeks, months, or years from now.

The EFA (EAFE Index / I-fund) danced along that 50-day EMA for weeks before the post Labor Day rally, which few expected because of the change in seasonality, which turned negative. Gaps are common on this chart because of the overnight trading. The EFA is nearing its longer-term resistance line so it will be surprising to see it make much more headway before pulling back again.

The weekly Volatility Index shows the descending trend continuing and it is now almost two years old. Complacency eventually ends but it usually takes some kind of event to do so, and that's not something that's easy to predict, but we know it will eventually happen. We got a small, brief taste of that in early August.

The AGG (Bonds / F-fund) was down for a 3rd straight day yesterday falling through some support but holding on another level. The trend is up but anymore downside and the rising trend would be in jeopardy.

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

Tom Crowley

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  1. FireWeatherMet's Avatar
    Hi Tom,

    I like your "gap identification within the channels" that you've been doing on your discussions. It certainly has helped me look at this as a quick "out and in" tool.

    Regarding the Aug 22 gap, I guess I had a different take on it...that it took us about 5 weeks to fill the July 13th gap on Aug 22???
  2. tsptalk's Avatar
    Yeah, that was an older gap that did take more time. Thanks. I should have marked that too. I was looking at that smaller gap opened on the 22nd.

SPY (C Fund) (delayed)

( Real-time)
DWCPF (S Fund) (delayed)

( Real-time)
EFA (I Fund) (delayed)

( Real-time)
AGG (F Fund) (delayed)

( Real-time)