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Peaking or bull flags?

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Stocks were flat to slightly higher on Tuesday with a morning rally losing a little steam in afternoon trading and taking the indices into negative territory. A final hour bounce took the Dow, S&P 500, and Nasdaq back out of the red and into the positive side, although Dow closed exactly flat, which is certainly a rare event. Don't forget that the TSP share prices below include Monday and Tuesday's market action, so they won't match Tuesday's tracking index.

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The market isn't making it easy on us commentators recently as the action has been very slow. The flat movement can be a double edge sword and we have to do a little tea leaf reading to try to figure out if we're seeing a flat top, or possibly bull flags as we touched on yesterday referencing the small caps chart.

The slow grind higher after the early October bounce off the 200-day EMA, in the case of the S&P 500, is the kind of action that seems to go on longer than most expect. At some point we'll see bearish investors give up and buy, and that's when the upside ammunition will run dry and we'll get a more meaningful decline. But whether that will be this week or next month is hard to say. Many of our indicators have been expecting it a couple of weeks now, and of course the market hasn't listened yet.

President Trump spoke at the Economic Club in New York yesterday and we heard about what you might expect from him. He extolled the current economic conditions. He said he'd like to see negative interest rates so that the U.S. was on a more level playing field with the rest of the world where negative rates have been around for a while. And he said that the U.S. is now in the driver seat in the China trade negotiations because China is in a more vulnerable position without a deal.

The public impeachment hearings start today and so far the market has ignored this. It's obviously a serious matter in the grand scheme of things, but I'm not sure if investors believe it is more political noise and not worth trying to price it in, or if they really just don't know what to make of it. If nothing else, it will likely make for entertaining television as the democrats and republicans get to put their faces on TV and rattle the "other side" to try to impress their constituents. Someone pass the popcorn.

The S&P 500 (C-fund) closed slightly higher on Tuesday which made it another record close, but because it closed well off the highs of the day, there's a risk of it being a negative reversal day. However we saw one of those last week and stocks rallied the following day anyway. It also broke above that narrow rising trading channel in early trading but closed back within it again.

This is basically the same chart that I posted above for the S-fund regarding the possible flat top formation - or bull flag.

The Dow transportation Index had that failed breakout last week and has since pulled back from that double top. It was down a moderate 0.64%, but it had rallied 800-points in about 6 trading days leading up to that peak so a little break here seems about right.

The EFA (I-fund) has been performing well but it is near the top of a large rising channel where there is resistance and certainly more room on the downside should things take a turn for the worse. There are a couple of open gaps below, with one being so large down by 64.50 that it is troubling to think what it would take to get it filled.

The Volatility Index is still trading in the 12's, and 12 seems to be the low end for the VIX in 2019. The two breaks below 12 this year preceded strong pullbacks in the S&P 500 within several days, but it hasn't closed below 12 yet on this test yet.

The AGG (Bonds / F-fund) was up slightly on the day but the trend is now on the downside since the breakdown, or second breakdown, earlier this month. It has closed below the 50-day EMA for four straight days, and 5 of last 6, so it needs some help here. As the yield on the 10-year Treasury hovers above 1.9%, the question is whether it can move back above 2%. If you think it can, then you probably want to avoid the bond fund.

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

Tom Crowley

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