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Positive trade news keeps rally going

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Stocks gapped up for a second straight day on Thursday after some positive trade headlines out of China. The Dow gained 373-points, and it was a sea of 1% plus green across the indices. If there was any negatives it would be that the highs were made in the first hour of trading, and from there we saw a modest drift lower. I suppose we can't blame investors for locking in some gains with the possibility of the next headline or Tweet just a quick click away. We saw some big moves technically with small caps and the Transports moving above key resistance levels.

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It's not too much of a surprise that we got a rally off some oversold / overly bearish conditions in August, and I would think that aggressive selling could be on hold while we're waiting for the Fed rate cut on the 18th and / or the new scheduled trade meeting with China in October.

Perhaps some of the easier money has already been made with the S&P 500 rallying 140-points off the late August lows, but it could drift higher into the FOMC meeting. Currently the Fed Funds Futures are predicting a 96% change of a 0.25% cut, a 4% chance of no cut. Of course we have to worry about something going wrong as the back and forth in those trade negotiations continues. The August Jobs report comes this morning (Friday) and estimates are looking for a gain of 145,000 - 165,000 jobs, and an unemployment rate of 3.7%. You might think that a weaker report could mean the Fed would consider a 0.50% rate cut and the stock market would applaud. But it might be tough to keep the recent gains we saw in stocks if the now un-inverted 2/10 yield curve starts to flatten or invert again.

While I do think there's a possibility that stocks could continue to drift higher in the FOMC meeting, it could be setting us up for a blindside move. The S&P 500 is now just 2% off the all-time highs. That's the bullish cry on the financial networks, but that doesn't always mean good things. I've used this chart before and have been wrong, but the possibility is still there. We know about double top pullbacks, which are obvious to short-term traders for a quick short trade, but in October of 2007, when the S&P 500 made another new high after a late summer pullback, the bulls were cheering. But they shouldn't have been.

Here's what happened next...

I'm not saying that's what going to happen, but as I mentioned yesterday, staying nimble in this environment is not a bad idea. There are no guarantees. Yes, there will be trading opportunities, but a new high doesn't mean all's clear. It could actually mean the opposite.

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The S&P 500 (C-fund) gapped up for a second time this week, but this time it broke above that bear fag that we have been watching. Those gaps are vulnerable for some backing and filling, but they felt like runaway gaps like we often see off of lows. They will almost certainly get filled at some point, but not right away as smaller gaps tend to do. There was an open gap off the lows in March that did not get filled until June. I marked the possible reversal patterns with red arrows, but you can see that these don't always turn into down days the next day when you have decent gains on the day like we saw yesterday, but a few days later we did see modest pullbacks before another rally started.

The S-fund blasted through some strong resistance yesterday when it moved above the descending resistance line, plus the 50 and the 200-day EMAs.

Same for the Dow transportation Index. It went from an awful looking chart to... hmmm, interesting, in one day.

The EFA (I-fund) lagged a bit despite some big gains in some overseas markets.

The dollar fell sharply early, but bounced back off that rising support line and closing near the flat line. This could be why that EFA lagged a bit, but I'm not certain. It looks like the dollar may continue higher.

The price of copper is very economically sensitive and has been beaten down much of this year because of China's roll in buying it. It has shown a little life over the last couple of days, most likely because of the recent trade meeting being set. It climbed over the 50-day EMA a couple of times over the last few months, but that's about where it failed. The jobs report could be a catalyst today and could be a telling story.

AGG (bonds) finally broke back into that rising trading channel after riding the top of it for weeks. That's a good sign for stocks for a while, because it means yields are rising, and that is what the stock market has been waiting for. It's too early to say if that channel will hold or break down, but if it does move toward the lower end of the channel, look for the rally in stocks to continue. The jobs report could be a deal breaker if it comes in soft as yields will likely fall and bond prices move back above the channel.

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. Have a great weekend!

Tom Crowley

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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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AGG (F Fund) (delayed)

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