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TSP Talk: Fed dovish, but investors take profits

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The Fed brought some volatility to the table as the indices were all over the place on Wednesday. After a big bounce off the recent lows, investors took some profits after the very dovish Fed meeting / policy statement. That's not unusual, but we did see some negative short-term technical hiccups on the S&P 500 and Nasdaq charts. However, if we look outside of large cap tech sector, the broader market actually did rather well. The Dow gained 37-points and S-fund, which contains most U.S. stocks minus the S&P 500, finished with a solid 0.30% gain. The Transports were up 0.68% and the Russell 2000 gained nearly 1%, so it really wasn't a bad day for most stocks.

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The Fed said everything a money manager would want to hear - lower rates for years to come, plus higher expectations for GDP and employment than from their prior meeting, so yesterday's selling may have just been some profit taking from the rally that preceded the meeting.

The media suggested that the market came down after Fed Chair Powell reiterated that the pandemic-induced economic downturn is “the most severe in our lifetime." Tell us something we don't know, right? That's why interest rates are 0% and the money supply is through the roof.

It's not unusual to see volatility pick up after an FOMC meeting, but now that the Fed is out of the way, we may start to see which way this market really wants to go.

Large tech was responsible for most of the losses yesterday as we actually saw gains in many indices, and the advance / decline lines were quite positive. Both advancing issues and advancing volume were quite positive, and the new highs easily outpaced the new lows.




The trouble for the S&P 500 was the negative outside reversal day formation, which usually means we could see some follow downside in the short-term, and because we have that "stealth gap" near 3341 that we've talked about, that could be a short-term target - although not necessarily of course. Open gaps can be self-fulfilling prophesies because everyone sees them, but these "stealth" gaps, which is my term and you may see them called something else online, are tougher to see, so many traders aren't seeing them or trading off of them at all.




The Russell 2000 was up nearly 1% yesterday, but that long tail on the chart isn't the best short-term indicator.




The Nasdaq was the big loser yesterday as the big techs that led the rally on the way up, were leading on the downside yesterday. It could just be some consolidation after the recent pullback, but it needs to stay above that 50-day EMA, otherwise it has bear flag written all over it.




The real dog days of September start today per the seasonality chart, so we'll see what this market can do facing that headwind.


Chart provided courtesy of www.sentimentrader.com





The S&P 500 (C-fund) lost about a half of a percent yesterday after hitting the top of that trading range (red box), and the most disappointing part was that it had large gains just an hour or two before the close. I hate the bear flag formation but having the 50-day EMA as the lower end of the flag is better, and potentially more firming, than a typical bear flag. I also see a possible head and shoulders pattern (blue), which can be bearish, but under certain circumstances is a continuation pattern and not necessarily bearish. In a down trend, yes, that formation would be very bearish. In an uptrend, it's either a topping pattern, or a continuation pattern, which doesn't give us much to go on.




The DWCPF (S-fund) has been outperforming the large caps. Despite the solid gains, there was a big negative reversal day, but it was an FOMC day and the volatility wasn't much of a surprise. There was some resistance at yesterday's highs.




The EFA (I-fund) made another attempt at a breakout yesterday, but it faded late with the post FOMC selling. It looks ready to pop, however.




The Dow Transportation Index did breakout to new highs, although the negative reversal affected it as well. There are now two support lines that could keep the breakout alive - the 11,500 area, and the rising support line which is near 11,300. It is getting a little stretched above the moving averages so some consolidation wouldn't be a terrible thing.




BND (F-fund) settled right in the middle of a fairly wide range, but ended the day almost flat. It remains in the trading channel, and there is support rising, and resistance falling so the apex is narrowing.




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

Tom Crowley



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SPY (C Fund) (delayed)

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DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
BND (F Fund) (delayed)

(Stockcharts.com Real-time)

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