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V, W, or a lower low?

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The market opened higher on Friday but it didn't take long for the bears to put the pressure on again. By about 1:30 PM ET, the Dow was 500+ points on the day, and it was looking like it could be another one of those -1000-point days for the Dow. But as the major indices started to test their 200-day EMAs we saw buyers step up and the Dow rallied into the close gaining 330-points on the day.

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As boring and consistent as the market had been on the way up over the prior few months, the downside has been that much more volatile and perhaps exciting, if you are trading this crazy action.

When stocks fall this precipitously it becomes less likely that the bottom will be shaped like a "V". "Dead cat bounces", as they are often called, can be explosive rallies, but a lot of pain and damage was dished out on the way down and that cat doesn't usually just keep running.

I posted this chart last week in the premium area and it's the kind of action that I might expect from here. The low may or may not be in, but even if it is, we could test it again after a relief rally as we saw in 2015 and 2016. Sure it could give us a "V" instead of a "W" bottom, but it doesn't seem likely.

The SPY (S&P 500 / C-fund) fell sharply intraday on Friday and it eventually tested the 200-day EMA, as we talked about on Friday. The market is always looking for support when it's on the way down, and the 200-day EMA usually holds on the first test. So far, so good.

The weekly chart of the S&P 500 shows how far the index had overshot on the upside - breaking through its long-term rising trading channel when the year started. In almost a blink of an eye, the correction took care of the overshoot and it actually moved all the way down to test the bottom of the rising channel.

The small caps / S-fund tested its 200-day EMA for a third straight day on Friday, and by early afternoon it fell sharply below the average, and the November lows, before reversing strongly into the close, and closing back above them both.

The EAFE Index / I-fund has not only been held back by the decline in U.S. stocks, but in the month of February the dollar has been climbing higher putting additional pressure on international stocks.

The Japanese Nikkei is testing its 200-day EMA now but ...

The German DAX, an important index in Europe, had fallen convincingly below the 200-day EMA earlier last week, then failed at it on the way back up. This is the concern of any breakdown of support - it can become resistance. Is this going to be the anomaly of the international indices, or is it going to lead the rest of the overseas markets?

The AGG (bonds / F-fund) was down again on Friday although the F-fund was given a small gain on the day. The trend is clearly down but it is testing the lower end of the channel and could try to also post a relief rally. But this chart is broken.

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

Tom Crowley

Posted daily at

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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AGG (F Fund) (delayed)

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