TSP Talk Blog

After tepid, light holiday trading Monday, stocks returned to rally mode on Tuesday with a healthy gain. The Dow moved 237-points higher on the day, and it was gains near +1% for most of the major indices, but don't forget that Tuesday's share prices include Monday's holiday dip so that's why they look a little below Tuesday's index results.

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Stocks seemed to be following through on last week's rally after Friday's trade "truce" but we actually could get another pop once the deal is put in writing or, on the other hand, if the deal falls through before it is documented we would likely get a serious pullback of the recent gains.

3rd quarter earnings season is kicking off while the S&P 500 is flirting with new highs, and while we normally get rallies into earnings season, then a sell the news reaction as we get deeper in, triple tops are less daunting than double tops so there is a better possibility of a breakout, particularly with earnings estimates so depressed. The prior highs were made a week or two into the 2nd quarter reporting season in July, so stocks may become more vulnerable after a breakout. By the way, the trade sensitive Semiconductor Index just made a new all-high yesterday.




The yield on the 10-year Treasury may tell the story. It has been in a downtrend all year, and like it did in September, it is poking its head above one of the major descending resistance lines. That turned out to be a failed breakout, but with the higher low being made in October (so far), there's a possibility of an attempt at a higher high, which could also give stocks the go-ahead to make those new highs.




Of course a tweet or a headline could always disrupt what we think is happening before our eyes, but as we get deeper into the normally stronger 4th quarter, investors may be more forgiving of any hiccups. That didn't help last year of course, but what are the chances of two major 4th quarter declines in back to back years? Historically 40% of all stock market gains have come in the 4th quarter.

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The S&P 500 (C-fund) found itself moving back above the 3000 level again intraday on Tuesday for the first time in almost a month, but closed a handful of points below it. There's a new rising trading channel making its way to new highs, but we've seen double tops fail so there could be some nervousness at a triple top, although they are more prone to breakout. Because that large open gap did not get filled down by 2950, we'll have to keep that in mind if this keeps moving higher, because we know gaps do tend to get filled eventually.




The S-fund closed back above the key 50 and 200-day EMAs yesterday. We like to see at least three closes above a breakout to confirm it, but it has to start somewhere. It did pause at some descending resistance that could turn out to be the top of a right shoulder of a head and shoulders pattern, but 1420 may be a possible upside target if it can bust through 1400 first.




The Dow Transportation Index is almost a mirror image of the S-fund chart above, so ditto, but obviously the price levels are different.




The EFA (I-fund) had a big day but you can see that there was a pause at a possible triple top, and with open gaps on both sides, anything can happen in the short-term. But this is not a bad looking chart. It looks like a cup and handle formation, which do tend to breakout.




AGG (bonds) was down sharply on the day as yields rallied again. You can see it came to rest on the 50-day EMA which may need to hold here. There's a little more support just below 112.50, and that's a pretty solid cushion, but if that fails bonds will be in trouble.





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

Tom Crowley


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