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TSP Talk: The rallies are being sold

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Not a good week for stocks and so far September has lived up to it's bearish reputation. The Dow lost 272-points with similar percentage losses in the S&P 500 and Nasdaq. The trend of the indices hitting their high during early trading, and fading the rest of the day is worrisome. Every time you thought the dip buyers were showing up last week, a new wave of selling hit the tape. Bonds were down as yield rallied. The dollar opened lower but rallied into the close.

Daily TSP Funds Return

Trading volume was relatively light during the holiday shortened week so my thought is that there may be more downside to go. Generally a reversal near a low will spike volume to an above average level, and so far we haven't seen that, although I suppose the holiday week could have affected that.

Internally the numbers were lopsided in favor of the downside. No surprise divergences here.

The dollar (UUP) was up and closed back above the 50-day average. This could signify another low but there is an open gap below that may warrant some attention.

At this point we can get a gauge of the character of the market by seeing what happens during intraday rallies. Are they being sold quickly like we saw last week, or can rebounds sustain themselves and cement in another higher low? Also, the intensity of any rebound after filling a gap or testing support is a good indication of health. Plummeting right through an open gap or a moving average would tell us that the bulls are holding back and giving the bears an opportunity to do their thing.

From peak to the low the S&P 500 pulled back 10.7% last September and then, after a strong bounce back, pulled back 8.9% again in October. We haven't seen anything that severe since and here we are a full year later, so is it time? Seasonality is on the bears' side for the next two weeks so the set up is there. If the bulls can withstand this setup, then the bears may just have to wave their white flags in surrender.

The S&P 500 (C-fund) fell sharply on Friday, closing below the 20-day EMA and right on top of one of the rising support lines (blue.) The open gap below 4450 is now just a few points away, and with the rising support and the bottom of that gap so close together, the bulls may try to use that to make a stand. If that fails then the 50-day EMA will likely come into the picture once again as we have seen month after month this year.

The weekly chart has barely blinked since last fall during those September and October 2020 pullbacks. But like in early 2020, sometimes when a long trend breaks, it can be harsh as prices get more and more elevated.

The DWCPF (S-fund) lost 0.85% and it closed just a few cents below its 50-day EMA. On this chart there are two fairly large open gaps and I would suspect at least one will get filled this week. The more pressing question is whether it comes down to test the longer term blue support line which is currently near 2180, but it's rising.

The EFA (EAFE Index / I-fund) was down just 0.22% but the negative reversal was pretty serious and it would be tough to bounce right back from something like that, so I suspect the open gap below 81 will get filled early this week. The chart was looking very strong but as of now it appears to be a failed breakout.

The BND (bonds / F-fund) was down but closed well off the day's low, bouncing off the 50-day EMA, although it didn't quite touch it. That 50-day EMA has been holding firmly for months despite repeated tests. The resistance area is still the top of that long trading channel.

The Dow Transportation Index broke down last week from that pennant formation, and as we've been saying, that had a bear flag look to it after the long decline off the 2021 highs. It has now closed below the 100-day EMA for a third straight day.

The High Yield Corporate Bond Fund actually made a new high on Friday before hitting resistance and flipping over. This is an interesting situation since the stock market rarely does poorly if this is holding up, so Friday's action was concerning and this could end up being a peak, but it's tough to call it very bearish since it made a new high in the last trading day.

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

Tom Crowley

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The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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SPY (C Fund) (delayed)

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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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