TSP Talk Blog

Anybody having fun yet? The Dow lost fell another 327-points yesterday, which was off the -450's lows, but the choppy backing and filling off of last week's lows is still in progress. So far it has been contained within the range that we've been talking about since last Thursday's big decline, and it continues to work through the process of either creating a bottom, or starting another leg lower.

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I was watching what the market was doing but I was purposely avoiding listening to the analysis from the financial channels. If you remember in yesterday's commentary I said this is technical analysis at work right now with the big drop, a relief rally, a pullback to test the lows, etc., and we'll let the folks on TV decide why it's happening. We have just seen this happen enough over the years to know that this is how it usually plays out.

The question is whether the lows, or a successful test of that low, will be enough to satisfy this pullback, or if we'll see another leg down where the process starts over. The latter is more rare, particularly when we're in a bull market and trading above the 200-day averages, but we're flirting with those levels breaking so it's touch and go right now.

Volume was not elevated so there was no real run for the exit yesterday. It feels like a typical test of recent lows, but of course this kind of action does not feel typical to us. 10% corrections develop on the average of once per year, but we went a long time without one prior to this year, so perhaps we're due for an above average number of corrections. The Russell 2000 small cap index has already reached that 10% correction level. The S&P 500 is about 6% below the recent highs.

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The S&P 500 / C-fund gave up most of the gains from Tuesday's rally yesterday, came back to test the 200-day EMA, and held. Is that it? Was that the test? Possibly. Did we see enough fear? Maybe. Do we need to hit the lows from last week first? Could be. If we look at the other choppy bottoms you can see that we do tend to put in a big one down day with a reversal, but the low closes do tend to be revisited. That could mean that the 2725 is still in play for any more possible downside. That's only if a bottom is being formed. If we see a close below last week's close, all bets are off and we may have to deal with another leg down.




The longer-term chart, going back to the low right before the 2016 election, shows a ton of support in the vicinity. As I said above, if last week's lows break and we move into that danger zone, then we could have some bigger problems then just a 10% correction. If you're not a TSP Talk Plus subscriber, join us to see how we're playing it.




The DWCPF (S-fund) was down sharply, and we're starting to get used to near 2% moves here - up and down. This could be a bear flag forming, but I would not rule out a rally back to the 200-day EMA at some point, even if it later fails.




The Dow Transportation Index continues to close below the 200-day EMA which is a red flag. This could be topping action but it has come down hard in a short amount of time. This is either the prelude to a crash, or more likely a relief rally is not far off. But even if we get a relief rally, this chart is broken and there is plenty of resistance to keep it from going back toward the highs.




The EAFE Index had a bad day, compounded again by a rally in the dollar. The I-fund chart has been in a bear market for a long time so this action isn't too surprising. The problem for U.S. stocks is that their charts are doing now, what this chart was doing a few months ago.




The High Yield Corporate Bonds failed at the 50-day EMA, which is bearish action. But, unlike the stock indices, this one is still above its 200-day EMA.




Bonds / F-fund was down again but in the process it did a little house cleaning by filling an open gap. The problem is, it fell right through the gap and closed just below it. So, investors weren't piling into bonds with yesterday's stock market sell-off.




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Thanks for reading. Have a great weekend!

Tom Crowley


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