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Bulls fighting the "sell the news" mentality

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It was another back and forth day for stocks on Thursday after the early opening rally sold off, battled back, then faded slightly into the close, but the bulls held onto some modest gains. The Dow was up 24-points and its 0.09% gain lagged the broader indices because of IBM's 5.5% loss. Small caps bounced back, leading on the upside, while the Transports continued their recent bullish charge off their recent lows.

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IBM's loss accounted for about 60 negative Dow points, and Netflix earnings helped the Nasdaq outperform the S&P 500 but that stock hit a brick wall after its strong open, and that contributed to the indices fading off their opening highs.

There are some signs that the market is overbought and due for a rest, but with earnings expectations so low, upside surprises may be the force that holds them up.

Then there's the recent optimistic outlook on the China trade deal after last week's upbeat meeting, and a deal being reached between the EU and the UK on Brexit. So the market had a lot of concerns coming into October and perhaps those concerns are starting to fade as we head into two of the most bullish months for stocks historically, and the end of the weaker "Sell in May and go away" six month period.

That may have been a good strategy this year since basically all of the 2019 gains came between January and April, but of course last year we had the unusually weak action in November and December so it didn't work so well.



Looking at this chart it is either forming a big top, or it is a long consolidation preceding a seasonally strong period breakout. You make the call.



The S&P 500 (C-fund) is inching closer to those all-time highs after a 0.28% gain yesterday. You can see that the move off the October lows has been fairly sharp and probably could use a rest, but the index has been consolidating since the July highs, or as you saw in the S&P 500 chart above, since the peak at the end of April. The open gap is still there for the bears to take near 2950, and with that being near the 50-day EMA, it wouldn't surprise me if it was revisited, but the action has been pretty good and a breakout to new highs in the near future wouldn't surprise me either. I am still concerned about a possible 2020 recession because of those recently inverted yield curves, but we'll watch the charts for clues and hope to be prepared if or when it happens. The lag between the two cam be quite a long time.




The S-fund played a little catch up yesterday and it ran up to 1400, which looks to be an important area to break since we saw one rally stall near there, and as we've been talking about, it could be near the top of a head and shoulders pattern.




I've shown this chart before, but the last time the Russell 2000 small cap index weekly chart was at the bottom of what is shaping up as a big bull flag. It closed above the 50-week average yesterday and it will be very interesting to see what happens if it tests the top of the bull flag. A breakout would almost certainly try to test last year's highs near 1750, so how surprising would that be?




The Dow Transportation Index has also created one of those bull flags as the Russell and Transports seem to be following each other this year.




The EFA (I-fund) may have already broken above a bull flag but there is still the July high that could act as a double top spoiler.




And it is a little surprising that the I-fund is closer to a new high than the S&P 500 with the dollar so strong all year. Although recently the UUP has pulled back and is now flirting with the bottom of that long term rising trading channel.




AGG (bonds) was off slightly and is firmly holding at the 50-day EMA, but so far no bounce like we saw in September after a brief breakdown. 112.50 looks key here.




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: www.tsptalk.com/plus.php

Thanks for reading. Have a great weekend!

Tom Crowley


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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)