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TSP Talk: The rally stalls

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Stocks slipped on Monday after a very choppy day of trading but the indices stayed in a fairly tight trading range. The Dow gave up 62-points and only the Nasdaq posted any kind of meaningful loss. Of course that was coming off of the big gains on Friday. Bonds were down as yields ticked higher. The dollar was down, and that weakness have to continue if we want to see stocks moving higher, and we'll talk about that below.

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It is more typical to see some upside follow through on a Monday when you come off of a Friday like we just saw. But overall it was barely a blip on the radar to see an 11-point decline in the S&P 500 after that 116-point gain on the final trading day of last week. So, it was curious since we expected the underinvested to be buying any dips in the coming days, and that didn't really happen with any kind of conviction. If there was a glass half full case, it was that the bulls gave the bears an opportunity to cut into Friday's 3% gain, and they really didn't go for it.

I mentioned JPMorgan's "prediction" of a potential 7% gain this week into the end of the quarter so Monday's action wasn't a good start, and as I said I was a little skeptical of that call - even though I also mentioned the recent tendency for strength to end a quarter. The reason for my skepticism is my questioning of why JPM would put information like that out there. It would obviously stimulate some buying from those looking for tidbits of information, so if JPM was looking to sell, that would be the way to get buyers to keep prices elevated while they dumped stock.

OK, this is not the first time I've shown my paranoia, and that's pure speculation, but JPM is in business for their clients, not the rest of the world where they broadcast their plan. On the other hand, if they were trying to help the public, just the act of putting that out there can prevent it from happening as other traders play off of it. It's a big trading game out there, and it's not easy beating the pros.

It's an interesting pivot point where we are and there are certainly compelling arguments on both sides as investor sentiment is still bearish enough to keep a rally going, but yesterday's stall may be telling us that profit takers are still lurking as they out numbered the buyers.
Sometimes when a rally runs out of steam it puts on the brakes for a day or two like yesterday, before rolling over and resuming the downside. Other times a pause is just a day or two of refueling after a major buying spree. Bottom line, it didn't tell us much.

The dollar has been slipping off its mid-Jun high and the S&P 500 has been rebounding since. It doesn't take a technical genius to see the negative correlation between strength in the dollar and weakness in stocks. So as the UUP approaches the purple 50-day EMA and the red rising support line, investors should be on their toes about whether those levels hold or get taken out. Stock market bulls would love to see this fall through 27.60.

The price of oil takes some of its cues from the dollar as well, but there are a lot more catalysts as well. Stocks get cranky when the price of oil starts climbing deeper into the triple digits. So, the bulls will probably want to see that 50-day EMA (purple) hold as resistance in this $110 area. However, it looks like the rising trading channel is trying to hold on. What next $112+ or below $102? That could be the big question, and again the dollar will play its role here as well.

So, I am watching the dollar, oil, obviously the indices, but one thing that has me concerned is the HYG chart. It closed at its lows yesterday and remains in bearish looking flag. If this breaks down I won't be as bullish on stocks as I'd like to be.

The S&P 500 (C-fund) was acting rather sluggish on Monday but after last week's gains I guess the bulls can't complain. However, coming off a Friday like we had, I would have preferred to see some FOMO buying (fear of missing out) from those who are underinvested and missed last week's rally. So it was a little disappointing, but stocks don't go straight up, and they usually don't go straight down, but they sure seem to go down faster than they go up. There's an open gap just above 4000, but a smaller open gap down near 3800 and we'll see who has the pull to get one of those filled first.

The DWCPF (S-fund) held up well despite the more negative tone yesterday, and the small caps of the Russell 2000 actually had a nice gain on the day. There's an open gap, but also a ton of resistance, in the 1700 area - and that resistance is moving lower every day. Like the S&P, there is also a small gap down below 1600.

The EFA (I-fund) was down and I know I get a little overzealous with these gaps, but there are still three on this chart that are all possible targets. Lots of resistance at 66 and above 67, and the support could come from the bottom of the gap near 62, otherwise closer to 60.

BND (bonds / F-fund) is pulling back from the recent rally up toward the top of that descending trading channel, which wasn't even quite tested. Overall, bonds have been beaten down so much that a "real" rally could be in the cards at some point, but for now the trend remains down.

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

Tom Crowley

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