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TSP Talk: Pullback in progress, one gap filled

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After Monday's big rally, we have now seen back to back moderate losses in the indices which, given how far stocks have come since the late September lows, is not the worst thing for the market to see at this time. We did see a couple of double top pullbacks in some charts, but that's all typical action and so far there hasn't been any damage done. The Dow lost 166-points on the day and the losses were fairly equally distributed among the indices, although the Transports actually had a solid positive day gaining nearly 1%.

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Some less than optimistic comments from Treasury Secretary Mnuchin put a damper on the idea of a stimulus package getting done before the election, but we've already discussed that last week when Trump said he was ending negotiations until after the election, and stocks have continued to rally anyway. It appears they are still discussing offers so nothing is out of the question, and that dangling carrot of a possible deal is still there and investors seem reluctant to do much selling with that being the case.

The internals had decliners beating advancers by 2 to 1 or less while the volume was much more even, so this wasn't anything suggesting any real weakness, at least not at this point.

As you'll see in the charts below, the two-day pullback is just doing some backing and filling, and we saw some open gaps get filled, but because stocks have not completely rolled over, we are seeing some bullish flag formations potentially forming again. And recently those flag and head and shoulders type formations have been behaving pretty much the way we'd expect them to, and that always helps with analysis.

The S&P 500 (C-fund) pulled back for a second straight day, and so far the dip has been productive in filling one of the open gaps and finding support at the bottom of that rising trading channel (blue.) I'd be a little concerned about a double top pullback, but the index would have to rally about 2% just to get to the prior top. Double tops pullbacks are short-term bearish, but they generally set up better breakout opportunities later on.

The DWCPF (S-fund) was down modestly losing 0.56% on the day, but that negative outside reversal day might get our attention. That angle of incline is not sustainable so some backing and filling (of the open gaps) would not be a bad thing in the short-term. Ideally we'd like to see the old high hold as support, but given how far it has risen above its 50-day EMA, the longer it moves sideways to slightly lower, the better the set up would be for another leg higher down the road.

The Dow Transportation Index was up 0.88% yesterday, bucking the trend of the broader market's weakness, and it actually made a new intraday all time high before pulling back into the close yesterday. 11,000 was the line in the sand for support last week, but we could see the old high near 11,700 try to act as support now.

The EFA (I-fund) was down slightly and a dip in the dollar helped hold it up and outperform the U.S. funds. That 66 area has been some stubborn resistance, and I am a little concerned about that blue rising wedge pattern that has formed in recent weeks. They tend to break down.

The price of oil continues to look intriguing as it builds one of those inverted head and shoulders patterns - the patterns that we saw break to the upside on the S&P 500 and Nasdaq charts recently. I don't like paying higher gas prices if this does breakout, but it would be a positive tell for the economic conditions if demand is rising.

BND (F-fund) has had a nice little run off the recent lows and is back above the 50-day EMA with a possible green light up to the top of that trading range. From there it may have some work to do, but that's OK. Lower bond prices mean yields are rising and that's may be what we want to see as evidence that the economy is improving.

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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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