TSP Talk Blog

It was a mixed, slow day for stocks on Monday, but mostly positive with some weakness in the tech sector. The Dow gained 195-points and, with the help a bounce back in the banks due to some funding relief, the small caps finally outperformed the large caps. Bonds were down sharply as yields rallied, and the dollar was down helping the I-fund to a strong day.

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First Citizens BancShares announced that they are acquiring a portion of Silicon Valley Bank's assets giving the banking sector a boost yesterday. That helped push the small caps higher which had been down sharply in recent weeks following the SVB and other bank failures. Whether this "fixes" the problems that have been uncovered in the banking sector remains to be seen, but for a day we got some relief.

The bank failures certainly changed the mood on Wall Street, and if you randomly threw a rock down Wall Street it would be tough to miss a bear. As a matter of fact, you may hit a bear and the ricochet may hit one or two more. That's one of the best cases for the bulls right now, but it's a good one. And, as we mentioned yesterday, the price action on the S&P 500 has been good, probably because of all those bears that we just hit with rocks. The other charts don't look quite as good but we're seeing some unusual activity in some of those charts.

I mentioned this in the forum yesterday so pardon the redundancy, but for those who did not see it, the flag formations that are historically solid indications of future direction, have been failing regularly over the last year. I'm talking about bullish and bearish flag patterns.

In this man bites dog chart action, bear flags have been breaking to the upside, and bull flags have preceded breakdowns almost everywhere you look.
The S&P 500 (C-fund) made a large bear flag in December, but rather than breaking down as is normally the case, we saw a major rally in January. Fast forward to the beginning of February where a really nice looking bull flag was forming, we got slapped with a major decline off the highs, and it hasn't recovered yet.




The same for the DWCPF (S-fund) which also formed a bear flag in December and a bull flag in January / February that broke in the opposite direction than conventional wisdom might have had us expect, but we just saw a bear flag breakdown at the end of last week, only to see it reverse right back into the flag as if everyone decided to buy the typical breakdown pattern.




How about bond yields? The 10-year Treasury yield was forming a bear flag just above the 200-day EMA, and the breakdown on Friday looked like a classic failure of two very strong bearish lines in the sand, but it reversed and bounced back quickly, running back into the bear flag. We get one of the Fed favorite inflationary reports on Friday - the PCE, which could make or break this chart.



And here's the Dow Transportation Index, with the same bull and bear flag Bizarro World reactions.

All of the current bear flags are technically still intact and that means they could break down again, but they've also made very nice positive reversals that has moved the momentum to the upside. Let's see how they turn out by week's end.

Is all of this being done by program algorithms to throw the average technical analysis off their game and perhaps question their approaches? Maybe. I've seen this over the years with other indicators that used to work great, but then completely stopped being effective. Maybe we just have to get used to the fact constant change is here to stay.

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We covered the S&P 500 (C-fund) and DWCPF (S-fund) above.

The EFA (I-fund) had a big day with the dollar falling 0.32%. It opened a second gap, so that's now two below the current level that may cause some backing and filling at some point. The angle of the descending trading channel is not very steep giving it a bullish flag feel, although it is getting little long to be considered a flag formation.



The weekly EFA chart shows some tough resistance near 72 but that could be a large inverted head and shoulders pattern, which does tend to eventually break upward, once the right shoulder forms. It's tough to say how deep that shoulder may or may not get.


BND (bonds / F-fund) gapped lower on Monday after filling the blue gap and backing off before testing the double top near 74.75. There is a lot going on with this chart but the most glaring may be the open gap down by 72. However, if the US is going to experience a recession in the next 6 months or so, yields would likely be falling and bond prices and the F-fund rising, so seeing that gap get filled would be interesting and tough to justify - unless inflation is back in the forefront of the Fed's agenda. The PCE report on Friday could be the catalyst for the next big move here.




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

Tom Crowley




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