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How long will the August playbook work in October?

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Stocks opened lower on Tuesday and pulled another reversal after a Jerome Powell speech driven midday rally failed as we headed into the close, and we had ourselves another loss greater than 1% in stocks. The Dow lost 314-points and there were no bright spots to speak of, except perhaps if the charts are telling us something, as we'll see below.

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Jerome Powell repeated several times yesterday that the interest rate policy will be dependent on the economic data. He also said that the economy is in good shape despite some troubles on the horizon, including global growth slowdown, the uncertainty surrounding trade, and he also mentioned Brexit.

They seem willing to use all and any tools to help with any weakness, but with interest rates being so low already, that's one tool that may not be available after a couple more cuts.

The U.S. turned up the heat on China and that seemed to spook the markets, but the higher level trade meetings start on Thursday and perhaps something will come of it. Probably not, but they could throw us a bone with stocks reeling again.

The S&P 500 (C-fund) bounced off the 200-day EMA last week, ran up to the 50-day EMA, and did another about face so it's a bit of déjà vu when we look back at the August action. It seems like a no brainer that we'll get another bounce off the 200-day EMA, but it's almost too obvious and the market rarely gives us a softball to hit out of the park. So, just when they lob one in for us, be careful that it's not a curveball that will be tougher to hit than it looks. But looking at this chart, it feels like we may have to swing.

A longer-term chart shows why we may not want to get too comfortable. Yes, the 200-day EMA may hold again, but this large rounded top head and shoulders pattern is getting quite obvious to a lot of chart technicians and if it breaks down it will get ugly.

The S-fund is even worse - at least the S&P 500 chart is sloping upward. This one looks like a classic negative head and shoulders pattern and we better keep an eye on that 1340 area because a breakdown there could trigger another 90 - 100-point decline.

The Dow Transportation Index is testing the triple bottom lows at 9700 so that is obviously the pivot point that we are watching.

AGG (bonds) was up but off the earlier highs of the day as the double top continues to hold as resistance.

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

Tom Crowley

Posted daily at TSP Talk - Market Commentary

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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