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Bottom in, or DCB?

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Stocks rebounded sharply on a Turnaround Tuesday following Monday's big sell-off. However, the gains did not even pick up half of Monday's losses, but the numbers were big all the same. The Dow jumped 312-points, and we saw 1.2% to 1.3% gains almost across the board, but the yield on the 10-year bond fell again, and that's a red flag for this bounce in stocks.

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China didn't devalue their currency as may have been expected and that caused an overnight reversal in the futures market, but of course we tend to see the biggest gains in the market after the biggest declines, so we're not sure exactly what the rally meant yet.

The start of a "V" bottom and a "dead cat bounce" look awfully similar, so after a big bounce off the Monday lows, we got one of the two on our hands. As our "Plus" service subscribers know, our personal trading system moved from a sell signal to a neutral signal on Monday, and that tends to mean that the market is as likely to move up as it is to go down, so both a dead cat bounce or a "V" bottom are possible, although I'd hope that it switches to a buy signal first before a low is actually made. But as of today I'm in limbo and don't know which way it will go, but my experience tells me that more often than not, sharp sell-offs like we had for 6 days, don't form "V" bottoms so easily.

Even recent market lows that can be considered "V" bottoms actually were preceded by failed dead cat bounces first. As we mentioned in yesterday's commentary, we got a failed "V" dead cat bounce in May before we finally saw the low at the start of June. There were also a couple of failed reversals in the fall of last year before that end of December "V" bottom low.

So, as impressive as it was, it's not typical for a 6-day plummet to end with a quick move to new highs.

Disney posted earnings last night and disappointed a bit and that could put a little pressure on the Dow today.

I'm just going to focus on the S&P 500 (C-fund) chart today since the other fund charts are in the same boat.

The index pushed below the 200-day EMA on Monday, but closed above it, and that was a nice clean area for it to recover. There is an open gap from Monday's weak open and that may or may not get filled soon, but eventually. The angle of the 6-day decline was steep so the rebound is not a surprise at all. How high it goes, and whether it holds is the question on everyone's mind.

The 2019 chart going back to the December 2018 low shows that we did see a break down below the rising support line (blue dashed), and yesterday's rally actually fell just short of recapturing that old support, and now potential resistance, line.

The chart that goes back to the January 2018 peak shows that long-term resistance holding at the top, plus that same support line as above acting as resistance, and another potential downside target if the bottom of the main rising trading channel gets tested again, near 2700.

Here's another look at the Chinese Shanghai Index as it has been breaking down from that head and shoulders-like pattern...

And here a repeat of the chart I put in the July 24 commentary showing how the Shanghai Index has been leading the U.S. market to some degree, so the recent breakdown in the $SSEC may be concerning for the S&P 500.

The price of oil did not rally with the market yesterday and this chart continues to look bad. The weakening economy in China may have a lot to do with this, as well as some concerns about the U.S. economy.

And speaking of the U.S. economy, AGG (Bonds / F-fund) was up again and the yield on the 10-year is still near multi-year lows so the bond market may be telling us it is expecting our economy to struggle going forward.

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:

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

Tom Crowley

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