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TSP Talk: Jobs report triggers rally, but some late profit taking

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Stocks were up on Thursday following a strong jobs report, but the big early gains didn't hold and we saw just modest gains into the close. The Dow gained 92-points, far short of the near 500-points it was up near the opening bell. The question is whether the selling wad due to technical reasons, as you'll see in the charts below, or if it was just nerves heading into the long holiday weekend as coronavirus cases mount.

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Heading into last week's jobs report, stocks had been up significantly for the week, and the overnight futures prior to the release of the report were also doing well. Then after the jobs report we saw the upside action explode even further, but that didn't hold onto the close, creating some short-term concerns on the chart. The yield on the 10-year T-Note also did a pop and drop after the jobs report, and we'll take a look at that.

We can't always trust pre-holiday action and the trading volume was quite light making it easier for the indices to get pushed around, so some late selling on Thursday may not mean a whole lot. Except for a couple of weeks of choppy digestion in the indices, for the most part the market has been holding up despite the recent increase in COVID cases, but I can see why there may have been some profit taking after a week that saw gains over 4% in the S&P 500 and small caps.

The record breaking jobs report sounds impressive, +4.8 million jobs and 11.1% unemployment rate, and it is, but of course this is on the heals of losing tens of millions of jobs during the COVID panic.

Seeing numbers like this does not make it easy to navigate through, and understand, just what it all means for the market for the short and long term. But looking at the chart we can see that something is keeping the S&P 500 from getting back up to fill that open gap near 3180. There have been several attempts, and each time, by the close, it has pulled back to give up that day's earlier gains.

Perhaps now that the long weekend is behind us, we'll get some resolution to whether this thing wants to reach up to fill that gap and challenge the prior highs. Or if this is going to be too much of a road block, and the big gains that we've seen accumulated in the indices over the last 3+ months are ripe for profit taking, more consolidating, or a lower high.

The S&P 500 (C-fund) had an interesting week as far as technical analysis goes. It gained 4% for the week but as we pointed out above, it has been hitting a clear roadblock near 3150. It attempted to climb back within that blue rising trading channel on Thursday, but the late selling took care of that and it closed back below it. On the other hand, it did manage to get, and close, above one of the descending resistance lines (red dashed line) off the prior highs. That's the line that the bulls will look to hold as support on any further pullback - so about 3100.

The weekly chart of the S&P 500 showed some improvement as it closed just above the long-term rising resistance line, which is part of that blue rising trading channel. It also remained in what looks like a giant bull flag (red). Bull flags tend to break to the upside, but that doesn't mean it has to do so this week. We could see more back and forth within the flag before it breaks out, and that's a wide range, but overall, the formation looks mostly positive.

The DWCPF (S-fund) also made some improvements to its chart despite the negative reversal on Thursday. It remained above both of the rising support lines off the April low after getting that bounce off of the 50 and 200-day EMAs, and the 50-day EMA should cross back above the 200-day EMA this week, barring any major selling..

The Dow Transportation Index had its reversal day last Wednesday and even though it was up on Thursday, you can see that it is still struggling to get back above that 200-day EMA. However, the 50-day EMA has been holding as solid support for a few weeks.

The EFA (I-fund) is back trying to recapture that orange 200-day Simple Average line but it struggled again. It does look like a bullish flag has been forming (red), which should be bullish, but it could also test the bottom of the flag again before doing so, so the short-term isn't too clear. We could see it breakout here, or test the 60-61 area gain first.

The yield on the 10-year Treasury jumped well above 0.7% after the job report, but then it spent the rest of the day sinking and actually ended the day in negative territory as the resistance at the 50-day EMA proved too much for it. It came to rest back at the top of that rising support line.

The BND (bond ETF) rallied on the drop in yields and the strength in bonds / weakness in yields is certainly concerning as the bond market doesn't seem to be as enthusiastic about the economy as the stock market has been.

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

Tom Crowley

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