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TSP Talk: Breakdown

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Stocks gapped open lower on Monday. I often say that we can't always trust Monday morning gaps, especially the ones on the downside, but yesterday's morning's selling and lack of dip buying in that first hour of trading made the sell-off look pretty serious. The fact that the losses were still fairly stiff into the close in most indices, despite the reversal, is a tell that this was not one of those gaps to dismiss. The Dow lost 510-points, well off the lows like so many indices, but the charts did take some technical beatings.

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I came into this week looking for two possible outcomes - a breakdown, or a hold at support - basically whether or not the 50-day EMA on the S&P 500 and a couple of key support lines on other charts, were going to hold or not. Most of those broke yesterday.

But of course the market almost never makes it easy on us. We did get those breakdowns, but we saw an afternoon positive reversal and most of the indices closed well off their lows, with the Nasdaq nearly getting back to even on the day. The question is, was it a positive reversal day, or just an oversold bounce that needs to be sold?

At the lows yesterday the S&P 500 was down 10% off its highs, which made it seem almost too perfect of a place for a correction to bottom, and get a reversal, but I guess anything is possible.

The Nasdaq, led by Apple, reversed strongly midday and Apple actually closed with a gain of over 3%. Being one of the major leaders, if not the leader of the tech world stocks, it set the tone for an afternoon rally. But still, the losses were sharp in most indices at the close, and particularly so for the small caps, which had outperformed last week. Positive reversals like the one we saw on the Nasdaq yesterday can bring some follow-through to the upside, but in a downtrend, that could be temporary.

If we're looking for a bounce I will remind you again of what the latter half of September can do to the market...

Chart provided courtesy of

Let's define what we're seeing. We have a market that has been down basically all month, breaking below key support lines, but rebounding late yesterday - probably because it was oversold in the short-term.

We have a Fed who is being as accommodating as it can to an economic condition that is getting better, but still fragile.

We have a congress that can't seem to agree on anything, particularly with the election just six weeks away, so if the market is expecting an agreement on stimulus, we may need a miracle. The market may have already priced in a stimulus package, and if that's the case, we may see that work its way out of stocks.

We have a seasonality calendar that tells us we are about to enter one of the worst 10+ day period for stocks historically. Not that they have to crash, but on average they have a poor record.

So, there's a lot of possibilities. The safe bet would be to step aside and see how it plays out. The aggressive bet is to buy into a 10% correction in the S&P 500. Being three weeks into a month, many market timers may be out of IFT's anyway, so their decisions have been made for them.

The S&P 500 (C-fund) gapped open lower and below the key 50-day EMA line that we focused on over the last several trading sessions. With that now broken, any relief rallies have to be on watch as the old support lines can become new potential resistance lines. And that's when we'll likely find out if the dip buyers have turned into rally sellers.

The year to date chart shows some support at yesterday's lows, but also a breakdown from that large parallel channel (orange.)

The DWCPF (S-fund) had been holding up so well, and even yesterday it had a huge positive reversal despite the 1.5% loss, and it managed to sneak just back above the 50-day EMA by the close. Yesterday's low looks like a possible successful test of the prior low, but it now has three levels of support broken, plus it may have only tested the bottom of a bear flag, which can always breakdown.

The Dow Transportation Index had been doing well holding above that long ascending support line (blue dashed) but it finally broke down yesterday. Does one bad day complete a pullback here or does it also need to pullback to test its 50-day EMA? Support line breakdowns are warning signs and we saw enough of them break on the other charts in recent days to know that there's likely more damage that can get done here.

The EFA (I-fund) - same story. Breakdown and failed breakouts. Another nice positive reversal but the chart looks a lot worse today than it did a week ago.

The High Yield Corporate Bond Fund also broke down after giving us some hope that the recent dip could be a positive sign for stocks. But alas, it too broke down below some key support levels yesterday.

BND (F-fund) was up slightly but remains in that tight range.

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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)

( Real-time)
EFA (I Fund) (delayed)

( Real-time)
BND (F Fund) (delayed)

( Real-time)

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