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A breakout of sorts, but another fade into the close

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Saturday's Preakness race horses can only hope they shoot out of the staring gate as quickly as stocks did at yesterday's opening bell. The quick rally took many by surprise, particularly the bears who were looking for the 50-day EMA to hold the recent rally back. There was a meaningful decline in afternoon trading that took the indices well off their highs, but they all closed with solid gains. The Dow added 215-points on the day and we saw gains of 0.80% or more across many of the major indices.

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The soft afternoon trading of late is a concern but yesterday the indices did climb straight up for the first 3 hours of trading, and in this volatile market environment it's not too surprising to some profit taking. Particularly when those trade headlines and tweets can come at any time. The lack of those over the last few days may be partially responsible for the three day rally.

Some of that upside acceleration early on Thursday may have been due to the break above the 50-day EMA in the S&P 500, where the bulls are more willing to buy again, and not only are bears less likely to sell, but they may be getting stopped out of short positions forcing them to buy to cover those positions. Rallies driven by short covering may not necessarily have lasting power, however.

That little negative reversal makes me a little nervous despite the break above the descending resistance and the move above the 50-day EMA.




Back in early 2018 the rallies off the lows, and the losses were much steeper then, saw some similar reversals that stopped the rebounds.




In the fall of 2018 it was the spinning tops that flashed us some warnings. However, the 50-day EMA was in the way here as well.




I suppose we'll have to see if yesterday's reversal meant anything, or if we start to see spinning tops, then we may have our warning signs. But as long as the S&P 500 stays above the 50-day EMA, it's hard to be too bearish. You can anticipate a move or react to a breakdown - whatever makes you sleep better.

Nvidia and Applied Materials reported strong earnings after the bell Thursday, both adding between 6-7% in after hours trading, and that gave the semiconductor sector a 3% gain in after hours trading, after it had not participated in the rally on Thursday and instead lost 5% on the day, so these were welcomed reports from these two chip companies.

I'm getting a little tired of watching the overnight futures because they have become such poor predictors of what we see when the market opens the next day.



The S&P 500 (C-fund) had a big day but you can see that sore thumb sticking up and that "may" be a problem. If it had gained 25-points out of the gate yesterday and stayed there, there would be no difference in value, but it would look technically better on the chart. It did break above the 50-day EMA and that short-term descending resistance line, but as we showed in those older charts above, sometimes these types of rallies are just short-term oversold bounces. I'm looking for some upside follow-through here while trying to avoid negative reversals and those spinning top formations mentioned above.




A move toward new highs and a breakout at this point is the only acceptable outcome after having pulled back from a possible major triple top - for all intents and purposes. Anything less and this may turn into the top I have been worried about.




The DWCPF (S-fund) backed off of its 20-day EMA, but recapturing the 50-day EMA is significant. What I'd be looking for here is if this rally stalls and becomes part of a large head and shoulders pattern, which would be bearish. So again, a move above the recent highs is almost a must.




The credit market perked up above the 50-day EMA like the S&P 500, and that of course brings corporate bond yields down, and as I mentioned the other day, that tends to open the door for investors looking for better returns, and when these yields get too low, they are more willing to bet on stocks. That's a good reason why stock valuations have been able to remain historically high, so it is key to the stock market for this chart remain bullish.




The Dow Transportation Index rallied strong but backed off the highest levels like everyone else. In the head and shoulders formation watch, that 10,700 area looks to be important.




The EFA (I-fund) ran above the 50-day EMA but backed off and closed below it again.




The Yield on the 10-year Treasury got a bounce off the double bottom and a small open gap was filled in the process.




The AGG (Bonds / F-fund) was down with those yields rallying. That short-term trading channel is testing the low side and a breakdown would likely get a test back to the breakout point near 108.65. Overall, the chart looks bullish and may just need a little rest after the recent breakout.




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Thanks for reading. Have a great weekend!

Tom Crowley



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S&P500 (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
BND (F Fund) (delayed)

(Stockcharts.com Real-time)

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