TSP Talk Blog

Stocks rallied back on Wednesday, and being the 2nd trading day of the week made it feel like a Turnaround Tuesday. The 50-day EMAs seemed to hold so far, although some late selling keeps the "dead cat bounce" possibility alive. The Dow gained 440-points and those beaten down Nasdaq 100 large caps tech stocks came roaring back with a 3% gain. Bonds were down as the 10-year yield moved back over 0.7%.

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The S&P 500 futures, which gained about 60-points yesterday, closed 29-points below their high, and the Nasdaq 100 futures, which gained a solid 310 points on the day, closed 109 points off its high. So it was a great day for the indices as far as the gain goes, but someone was pushing the sell button pretty hard in those final 30 minutes of trading.

The Equal Weighted S&P 500, which puts the same emphasis on each stock in the S&P 500 index, was up 1.2% - a solid gain but well below the major indices' returns, which were helped by some big gains in those large tech stocks. Technically, the charts are telling us that the pullback could be done, and the rebound started in a very good area as support from the 50-day EMA and rising support lines behaved just as the bulls would have wanted -- so far, but the bears are calling for the dead cat bounce effect. I'm sure most of you know what we mean by dead cat bounce, but if not, the term implies that anything that falls from a high enough elevation will bounce when it hits the ground (support), but it won't necessarily have any energy to keep the bounce going. We'll see.




So the indices went from overbought to short-term oversold in hurry and we got a snap back rally. That doesn't tell us a whole lot because this kind of rally could come at a pullback low, or during a temporary relief rally. The key for the bulls is follow-through and taking out any over head resistance that may have been created on the way down.

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The S&P 500 (C-fund) couldn't have found support in a better place this week from that sharp three day pullback. That doesn't mean the pullback is over, but there is generally buyers ready, especially in a bull market, to buy any pullback to the 50-day EMA. However, you can see that the rally pushed the S&P back up to the 20-day EMA and it may now provide resistance, and the S&P pulled back late on Wednesday after hitting it.




I mentioned in Wednesday's commentary that there was a "stealth" gap opened on Tuesday, and that gap was closed yesterday. Again, the gap didn't look opened on the chart using the candlesticks, but it was the space between Friday's closing price and Tuesday's high that made the gap, and like magic, the gap was filled and the top of that gap held as resistance on Wednesday.




The DWCPF (S-fund) recovered its 50-day EMA after closing below it for one day. Officially that's not a breakdown yet, but you can see that there are a couple of resistance lines that held yesterday near 1525, that could be roadblocks for the rebound. If those are taken out and it can close above 1540 or so, that would be a bullish move over that resistance.




A longer term view of DWCPF (S-fund) shows the breakdown from the rising support lines (blue) but one support line remains intact - the red one - coming off the lows from back in June. The 50-day EMA has been a pretty solid rock of support since late April, so a breakdown would be meaningful, and a change of character for the small caps. So far, so good as it held after one day below it.




The EFA (I-fund) popped back up to the top of that narrowing wedge-like formation, after the failed breakout sent it back to the bottom of that wedge. The dollar has been stabilizing above its recent lows, and that may cause a headwind here if that continues.




BND (F-fund) has traded between the 20 and 50-day EMAs for the last two days. The formation looks bearish, but as I often say, the bond chart tends to do the opposite of what my chart analysis suggests it might do. This looks like it wants to go down to me, so does that mean it's getting ready to rally?




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

Tom Crowley



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