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TSP Talk: 50-day EMA holds as resistance

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Volatility is back and September's reputation remains intact as the bears took control again after a day and a half of rebounding. The Dow lost 525-points, or 1.9% while the Nasdaq and small caps lagged with losses near 3%. After a positive open, the S&P 500 hit the 50-day EMA and reversed back down, and that may be a troublesome development with yesterday being the 4th straight day that the index closed below the 50-day EMA.

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The recent selling may be a stimulus tantrum from investors who have wanted, and expected, congress to do something since the first wave of stimulus ran out over the summer, but in an election year we probably aren't going to get an agreement on much from the two sides. We've talked about internal strength and weakness often and recently I suggested that the advance decline numbers weren't that bad considering the losses (that was on Friday) but yesterday we got a taste of what a real bad day looks like. The advance / decline issues and share volume ratios on the NYSE were about 10 to 1 in favor of decliners. On the Nasdaq it wasn't quite as bad, but it wasn't good. New lows nearly doubled the new highs on both the NYSE and Nasdaq.

At some point things get too extreme and we get a relief rally, but yesterday was just the first down day after that positive reversal on Monday, and rebound on Tuesday, so this selling may not be over yet.

Volatility is high so like we saw earlier in the week, if there is going to be a reversal, whether it holds or not, it could happen very quickly and unfortunately with our 12 noon trading deadline in the TSP, and our limited transactions, it won't be easy to try to pick a low or play the gyrations. But buying into a capitulation level of weakness tends to work, even if it isn't the bottom.

However, there are times when capitulations turn into "puking" levels, and while that is a rare occasion, we just saw in March so it is still fresh in investors' minds.

Healthy corrections and pullbacks will be in the 10% area and tend to successfully test the 50-day EMA, which is about where the S&P 500 is now, or slightly lower, so we're seeing signs that these are not going to hold and perhaps the 200-day EMA is the next downside target if we don't get a rebound very soon.

The S&P 500 (C-fund) tagged that 50-day EMA after that relief rally, and rolled right back over, and while that's not what investors want to see, traders are glad to see the technicals working. They want to see the 50-day EMA hold as support when the S&P 500 is above it, and they want that EMA to hold as resistance when it trades below it. Conventional wisdom would suggest that the next downside target would be the 200-day EMA, but there is some support near 3200 first.

The DWCPF (S-fund) made its lowest close yesterday since late July, which means Augusts' 7% gain has now been lost. It's trying to hold in this area which has held three other times, but should that 1487 area get taken out, the 200-day EMA would be in play.

The EFA (I-fund) also failed at the 50-day EMA, which held firmly as support over and over in prior months, so that doesn't bode well for the I-fund now that it has closed below it for three straight days.

The Dow Transportation Index was up sharply in early trading, filled that open gap and tested the old support line, then rolled over and created a negative outside reversal day in the process. IT may have its 50-day EMA in its sights.

Copper is actually still trading near recent highs, but I have been fascinated by the reversal in the price of lumber this month, which basically gave up all of its bubble-like rally during July and August. It reminds us that, the bigger a rally gets, the harder it can fall. On the bright side, the rising lumber prices were adding an average of about $15,000 to the price of building a new house. That should start easing now.

BND (F-fund) is now testing the lower end of the trading range that it has been in for the last six weeks. It did close back below the 50-day EMA, which it hasn't done very often lately despite trading quite close to it during those six weeks.

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

Tom Crowley

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DWCPF (S Fund) (delayed)

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EFA (I Fund) (delayed)

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BND (F Fund) (delayed)

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