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TSP Talk: Another October surprise

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Stocks took another pummeling with the Dow dropping nearly 1000 points on the day, and 3% - 4% losses in many of the indices. There was very little attempt by the bulls to do any buying. The next week ahead of us is going to be packed full of news and events and the market could do anything, and that makes it tough to keep emotions out of trading. Normally buy low, sell high, is a winning mantra, but as we saw in March, low can get really low a times.

Welcome back to the COVID panic, and this time it's on top of the election jitters, the stimulus failure, and a new round of rioting. None of these are surprises as far as I'm concerned so I am surprised that the market is reacting this way. It is usually way ahead of the headlines, so maybe it sees something down the road worse than the current situation?

The VIX (Volatility Index) jumped to its highest level since June, so fear is rising and this is about as high as it got back in June, but we have to look that further back to see when investors were really fearful.

Here's a look at the full year of the VIX and this is the 3rd time it has hit this current level or higher. The one in March is off the charts because of the COVID scare and the one in June was a decent intermediate-term low for stocks. This current reading comes with another wave of COVID but I think more information on the virus since March may keep it from getting back to those prior panic levels. That's the S&P 500 chart below the VIX.

The "smart money" is actually betting on much lower volatility after the election via options. Not that it means stocks are going to rally today or in the next couple of days, but according to

"The 10-day average of the VIX Put/Call Ratio has climbed above 1.5, the highest in more than 13 years."

Only in late 2011 and early 2009 did we see a higher put/call ratio on VIX options, and both were near major market lows.

We get the 3rd quarter GDP estimate this morning, and the estimates are near +30% - something I don't think we've ever seen before, just like the -30% last quarter was unheard of. The weekly Initial Jobless Claims also come out before the bell and are expected to be about 760K.

Another reminder that after the bell today we get the big 5 FAANG type stocks earnings reports that could make or break the market. Brace yourselves. Friday could be a big mover.

The S&P 500 (C-fund) gapped lower opening up another large gap. It's a very clean gap in that the high of the day was right below the old descending support line. That's technical analysis for you. That pesky open gap from mid-September that seemed so far away just a few days ago, was filled yesterday, and the S&P is back near the September 25 levels so a month's worth of gains have been given back. It's hard to see but the 200-day EMA is down just below 3200.

The whole market has been impacted by this sell off but I'm going to focus on the S&P 500 since it is one of the main drivers which contains big tech and a broad range of other sectors. There is a case that yesterday's low may be the bottom of a parallel trading channel. That channel can be broken but there will likely be a lure to get back within in it.

The weekly chart also shows that really long-term trading channel which has also been broken a few times, but the S&P seems to want to make its way back toward it. The 50-week moving average can be an excellent level of support in a bull market as we saw repeatedly over the last 3 years, but we did see a couple of major breakdowns in there. The top of that channel and the 50-week average are converging near 3165.

The DWCPF (S-fund) filled another open gap (blue) while opening another (red). An optimist might say buy here because we know the overhead open gap will eventually get filled, but don't forget about that open gap down near 1520 which is still a possibility on the downside. That's the same mid-September gap that was filled on the S&P 500 yesterday.

BND (F-fund) rallied early but reversed down to close lower so there was not much was working yesterday. There was some resistance that held at the top of that new blue descending trading channel.

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

Tom Crowley

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