TSP Talk Blog

Stocks rallied on Friday, tacking onto Thursday positive reversal day, and closing the week out with some solid gains. The Dow ended the day up 369-points during the quiet, lighter than normal volume trading week. Things may start to heat up this week as we get a series of economic reports, and earnings season will get into gear with some major banks reporting, and Netflix later in the week.

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This week looks like it could be a very key one for the indices which are showing signs of breaking out of some long consolidations. Unfortunately, there are some other troubling developments that we will have to watch because it may be trying to tell us something, and that something may not be as good as the index charts may have us leaning. It's a very interesting period.

Whether we're looking at the dollar, the price of commodities, bond yields, the credit market, the VIX, the financial and energy sectors, there are signs of trouble. Yet the stock indices look very interesting and primed for a breakout.

The Nasdaq, particularly large tech, has been on fire lately and perhaps getting a head of itself in the short-term. The question is whether this is going to invite the other indices to join in on the new highs, or if perhaps a much needed pullback in tech stocks will take the rest of the market with it?

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The S&P 500 (C-fund) looks to be at an important pivot point here. It closed on Friday at its highest level since early June, but there is some stubborn resistance in this area and that's why the next move is so critical. We could see a rally and that would push the index into a double top situation. Or it could follow the lead of the Nasdaq and just breakout to new highs to eventually try to make a run at the February highs which are near 3400. If it failed here at resistance, then a move down to the 3050 area, where 50-day EMA is currently, is not out of the question.




The weekly chart shows how productive last week was as it closed above that top resistance line for only the second time since the bear market rally started. We can see that the old resistance line may provide some support in the 3130 area. But we can't forget that last week was a light volume post holiday week that had a strong positive historical seasonal bias, and the coming weeks won't have that advantage.




Like the S&P 500, many of the stock index charts look very good and potentially primed for breakouts to the upside in many cases. The problem is, I see at all of these next few charts as potential warning signs, and with most of them being on the cusp of major breakdowns, this week is huge!

The dollar could either breakdown from that bear flag, which may give stocks a boost initially, but if the dollar does bounce back up to the top of that flag first, we could be looking at a pullback in stocks.




The financial stocks continue to lag badly as the low interest rates negatively impacts their earnings potential, and many of them will report this week. Again, we have a bear flag that could break down soon, or it could decide to rally back up toward the top of the flag first.




Despite the price of oil doing well recently with the help of the decline in the dollar, the energy sector is also lagging and it not only already broke below a bear flag, it is now testing the neckline of a bearish looking head and shoulders pattern.




The yield on the 10-year is trying to tell us something, and I can't see that being something bullish. This head and shoulders pattern, should it breakdown as they tend to do, would have a downside target yield of about 0.40 - 0.45%. That sounds like trouble, but I suppose it's a good reason to opt for stocks. The S&P 500 dividend is paying 1.87%.




The price of gold could be considered a safety trade, so the recent strength could be a warning sign, but the weak dollar is a key catalyst for this rally.




Same for the commodities like copper and lumber, which generally signal strong economic conditions, but here too it could just be the dollar's weakness because the bond market is certainly not on board with the strong economy theory.




The DWCPF (S-fund) looks fairly healthy despite the Russell 2000 small cap index struggling of late. Technically, there is a small bull flag breaking out of a large bull flag. What's not to like, but on any further upside we could hit a double top resistance area and get a pullback of some sort.




The Dow Transportation Index has a similar situation with double bull flags. But this one is still struggling to recapture the 200-day EMA. Delta Airlines reports this week and could be a major catalyst.




The BND (bond ETF) made another higher high on Friday but it reversed down and closed near the lows of the day and ended with a moderate loss. The trend is still up and no lower low was made, but that was a negative reversal day so we could see some initial weakness early on Monday in bonds.




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

Tom Crowley


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