TSP Talk Blog

Another better than expected inflation report (PPI) sent stocks flying higher at the open, but by the end of the first hour of trading we started to see the tape weaken and while over all the broader market actually had a good day, the major indices were mostly flat to lower. Bonds were down as yields and oil rallied, and that may be a problem for the market rally.

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The market is probably due for a pause and the buying recently may have been caused by short-cover buying - meaning those who were betting against stocks were losing money, and they either waived the white flag and gave up and bought to get out of those positions, or they had stop orders get hit that got them out of their short positions at certain prices, and that's what can trigger the fake outs that we've been talking about lately.

We saw a lot of reversals yesterday, not only in stocks, but in bonds, the dollar, High Yield Corporate Bonds, and metals. However, the broader market saw a lot of positive action with the NYSE seeing 19 stocks up for every 13 down, and share volume nearly 2 to 1 in favor of the advancers. The Nasdaq wasn't quite that strong but very positive considering the index was down on the day.




The yield on the 10-year Treasury had been gaining some strength but now the test comes with the open gap finally getting filled, and the head and shoulders pattern, which is bearish, continuing to try to hold. One thing that has helped the stock market recently is the decline in yields and a drop in the price of oil, but both of these are making an attempt to move higher.



Oil broke above some resistance but after hitting the 200-day EMA at the highs near $95 a barrel yesterday, the energy sector may be trying to make a comeback after the two month decline, That wouldn't help the stock market, nor the inflation picture after the drop in oil and gasoline helped keep that CPI report below estimates.


The dollar was down early but like most everything else, it reversed to close slightly higher. The reversal up weakened stock prices and is not just the I-fund that reacts to the move in the dollar. Take a look at the second chart which is a 5-minute intraday chart.



It shows the S&P 500 (black) moving counter to the UUP dollar ETF (red) all day yesterday.


It's Friday and it has been a busy, mostly bullish week for the market with the inflationary picture perhaps finding some relief. But the charts may be starting to turn a little and it could start getting tougher for the bulls, especially the ones who were skeptical and bought into the rally late. They wanted to be bearish but gave up and reluctantly bought the strength late in the rally, so they probably won't hold their positions very long if there's any sign of weakness coming.

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The S&P 500 (C-fund) followed Wednesday's rally with a big gain on Thursday morning, but the rally ran out of steam and we ended up with a negative reversal day. These are generally bearish for the short-term but we have seen a lot of reversals in recent months that didn't tell us much at all, so I'll take this one with a grain of salt. But, there's always a but, this market rally is probably due for a rest and the bears may have this setup now to make that happen. But will they? There's not a whole lot on the calendar in August and the summer doldrums may start to kick in.




The DWCPF (S-fund) also gave up a big gain to close flat on the day. It tried to tag that 200-day EMA but came up just short. It also tried to break above that rising wedge pattern - which normally are bearish and get taken out on the downside - so the bulls have some work to do to keep this from breaking back below 1800.




The EFA (I-fund) was also flat and the positive reversal in the dollar took all of the early gains. It's had a nice run but there is a lot of resistance on this chart.




BND (Bonds / F-fund) got slammed yesterday as yields spiked higher. It may be trying to create a right shoulder in that inverted head and shoulders pattern, which tend to be bullish. Right now stocks and bonds seem to be moving together so the stock bulls may also want to see this hold up above that 50-day EMA.




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Thanks for reading. I appreciate it. Have a great weekend!

Tom Crowley




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