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To "V" or not to "V"?

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Stocks rebound and follow-through on Wednesday's positive reversal. The Dow rallied 377-points, or 1.43%, while the broader indices performed even better. The Nasdaq and small caps added over 2%, and oil stopped its bleeding for a day gaining 2.8%. Bonds bounced back from some early morning selling.

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The action was obviously good and the reversal came right where most charts needed to see them, particularly the S&P 500 which never did see a close below the 200-day EMA, surviving 3 days of testing that area. But these huge rallies do tend to come on the heals of major declines. "V" bottoms have been more common of late, but they are not historically the norm at market bottoms. For that reason we may want to be on the lookout for another test of the lows, especially now that the open gap was filled and the 50-day EMA is getting tested..

Investors are now waking up each day and checking on the trade tweets, although yesterday it was another interest rate tweet directed at the Fed. Other things investors are watching are the Chinese Yuan, the price of oil as it successfully tested a triple bottom near 51 this week, and maybe the most important indicator right now is the 2-year / 10-year yield curve which is getting very close to inverting for the first time in about a dozen years - prior to the last recession.




Last month we talked about the 3000 level getting hit and how we had to lookout for what happened when 2000 was hit for the first time and interestingly, in 2014 it came right back down to test the 200-day EMA before rallying all the way back, which is what it is trying to do now.




Not that I expect the action to mimic 2014, but this shows that we may have already gotten through what we needed to see after the run up to the emotional number.




My take is that we're not necessary out of the woods because of the uncertainties with trade, the yield curve, and the Fed, but we've seen enough "V" bottoms lately to may take the edge off of the concern. I'm optimistically concerned for the short-term, and I just saw that the futures opened sharply lower Thursday night, so the volatility is not going away yet.

Longer-term, I still think there's a washout in cards still out there, since it has been 10+ years since the last major decline. Whether it comes this year or not, I'm not sure so I continue to stay on my toes, and unfortunately have to remain on guard and mostly defensive until it comes. Perhaps if Trump can convince the Fed to move back to 0% interest rates, we'll have more action like the prior 10 years. But I don't see how that can be healthy for the long-term of the economy.



The S&P 500 (C-fund) filled the open gap from Monday's gap down and incredibly it has recouped all of the losses since Friday's close, which has been a pattern this year - early weekly losses followed by a rally back later in the week. The S&P hit the 50-day EMA which was the top of yesterday's rally, and while momentum is good, shooting right back above the 50-day EMA on the first attempt isn't always easy.




The DWCPF (S-fund) also filled an open gap (blue) and opened a new smaller gap along the way (red). The breakdown from the rising trading channel certainly turned out to be the correct warning sign, but is that it? It's back above the 200-day EMA but still below the 50-day and perhaps it will bounce around in that range for a while, since technically it is still in a bit of trouble, despite the big gains over the last two days.




The EFA (I-fund) also filled a gap while opening another, but unlike the S&P and small caps, this one is still below the 200-day EMA so the test is still to come.




The AAII bulls to bears ratio came in less than 50% which meant we got the rare occurrence of more than two times bears for every bull. That can be a sign that the worst is over, or nearly over, especially in a bull market. But it doesn't always mark the low as we saw in December when we had a similar reading about two weeks before the bottom was in.




AGG (Bonds / F-fund) rallied back from an early sell-off but it is now close to the top of that rising trading channel, that saw a failed breakout on Wednesday.




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Thanks for reading. Have a great weekend!

Tom Crowley


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

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SPY (C Fund) (delayed)

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

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

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

(Stockcharts.com Real-time)