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Post holiday sell-off flirting with Feb. lows

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The market pulled an April Fool's prank on us by rallying strongly leading up to the the new month, then tanking once everyone felt a little more comfortable. The Dow lost 459-points on the day, and it was a deep sea of red for all of the indices. If there was a bright side, the Dow closed about 300-points above its low, and the S&P, which lost 59-points on the day, closed about 28-points off its intraday low.
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Yesterday was the 7th 2% move in the S&P 500 in 2018. In 2017 we had... zero.

This is one of those days where I can write several pages of analysis and theory but the fact is we've talked about all of this. As you'll see in the charts below, the market is just taking its time testing the lows. So far it has held but it it starting to get a bit dicey again the closer we come to that February 9th low print. It's never an easy process to watch as volatility gets elevated, but when you zoom out on the charts it looks almost orderly, as you'll see down below. I don't know for sure if the lows will hold, but the test is in progress. And even if they do hold and we see a meaningful rally off the current lows, it doesn't mean the lows for the year are in. We just have to watch how the charts develop.

I showed this to our TSP Talk Plus subscribers last week, but I don't think I posted it here. Clearly it was not just a holiday thing that we just witnessed, but this old chart, which shows 62 years of data from 1950 to 2011 of the average action before and after Good Friday / Easter weekend, has an interesting pattern which has played out as advertised. If it continues, Tuesday could be a bounce-back day.


Chart provided courtesy of www.sentimentrader.com



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The S&P 500 / C-fund broke back below the 200-day EMA after several attempts to stay above it over the last week. There are a few of notable formations to mention, the first are the two bear flags that we've been showing and unfortunately suggesting that the downside target of the breakdowns would be near 2400. On the positive side the red falling wedge pattern is more bullish and they tend to break to the upside eventually. I would give the advantage to the flag formations but the 200-day EMA will play into the bullish side as will the February lows if this market just wants to test the lows before moving higher. It's always a tough call to predict a bottom.




I've isolated that "h" formation in the chart so we can compare it to similar prior situations...




In 2011 we saw a choppy consolidation in between an August low and a October test that held and the market rallied from there.




In early 2008 we saw another "h" formation that also produced a double bear flag like we see today, and it made that falling wedge formation. This was a successful test that preceded a rally. Of course we know what happened later in 2008 so that's why I mentioned above that a rebound from here does not necessarily mean the worst is behind us for the year.




Then there's the 2015 and 2016 "h" lows, which I am sure you've read about here for the last two months...




As I said above, when you zoom out it looks almost orderly and predictable, but while it's unfolding it can be unnerving.


The small caps / S-fund were down sharply and it is finally down testing the 200-day EMA, which it penetrated early, but closed above it again yesterday..




The Dow Transportation Index was down about 2% on the day but it did not breakdown yet. It's a bearish looking flag formation, although it looks more like a mega-phone now, and it remained above the 200-day EMA.




The AGG (bonds / F-fund) was down as investors did not jump on a safety trade here. I suspect an attempt to test the 200-day EMA could be coming, but bonds are still in a bear market and rallies should be sold until it can get back above that EMA.




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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