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Another reversal. This one down

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After spending most of the night in negative territory, investors woke up to a big upside pop in the stock index futures which led to a very strong open for the stock market. This was triggered by some positive comments regarding trade negotiations with the Chinese. The Dow opened about 300-points higher, ran up to +368, then spent most of the rest of the day giving it all back - closing with a loss of 53-points.

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This, following Monday's big positive reversal, was a let down for the bulls, but in a bear market is typical action. The bears will pounce on strength. Even the afternoon rally faded into the close. It is debatable whether we are in a bear market since we haven't hit levels that some use to define one.

Eventually the downside will be pressed too hard and we'll get a big relief rally, but we've been waiting for that capitulation-like day where the bulls just give up, leaving no one left to sell, and that's when we'll see a strong snap-back rally. Sounds easy but no one rings a bell when it's happening, although capitulations are not hard to spot when folks are running for cover in fear to sell at any price. The rallies that come off of oversold conditions will likely be short-lived, until we see that capitulation.

The financial stocks continue to lag and comparisons to the market on the 10-year anniversary of Bernie Madoff's 2008 arrest are being bantered, but while banks may be suffering because of earnings issues with yields pulling back again, there is no similar financial crisis so it's not a apples to apples comparison. Now the corporate debt bubble, that's a different story and could be the next shoe to drop.




Next week is the FOMC meeting and while there are some firm expectations of a rate hike, but it's their updated policy statement that everyone is waiting for.



The S&P 500 / C-fund is struggling in this area to hold that 2625 level that seems to be the line that the bulls and bears are trying to carry the ball over, and so far the bulls have been able to hold that line on a closing basis despite several intraday pushes below it. If the bears can take that line, that's when it could get ugly. The indices are oversold and due for a bounce, but sometimes the worst bear market sell-offs come out of oversold conditions. Translation, we could get an oversold bounce, but if we don't, look out!




The DWCPF (S-fund) closed below that bearish flag for a second straight day but it is still hanging around and not giving up yet. Like the S&P, there a line there that needs to hold or we could see a nasty bear flag breakdown.




The Transportation Index had its bear flag breakdown start last week, and now it is trying to hold at the October lows. It fell below it on Monday, but closed above it the last two days.




The I-Fund (EAFE Index) has been ugly for months and we've just expected bearish out comes. Each time it has rallied up to resistance, it has failed, and for now I don't see why that will change. The bottom of that rising support line near 62.25, which is part of its bear flag, would be the next resistance area if it can get up that high again.




The dollar was up again and made a new higher high, so the rising trading channel resumes and that is putting pressure on a lot of assets including stocks, oil, but not gold, which is actually a bad sign since investors are moving to the safety of gold and bonds lately.




The AGG (bonds /F-fund) was up slightly to flat yesterday as it gets closer to testing that possible double top.




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

Tom Crowley


Posted daily at www.tsptalk.com/comments.php

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