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A pause at resistance

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There was an exhale on Wall Street yesterday after a morning rally faded in afternoon trading, and it seemed to be a combination of issues with Brexit, impeachment headlines, some disappointing earnings, and technical conditions as some indices hit resistance or neared prior highs. The Dow lost 40-points, and while we did see some green in the Transports and Russell 2000 again, stocks certainly came off their morning highs and the broader indices were down more moderately.

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The Nasdaq was the negative catalyst after a strong open but it experienced a strong reversal after it tried to break above descending resistance line off the previous highs. It has been about three week since the early October low and resistance like that will trigger technical traders to sell, and investors will follow and take some short-term profits.

The S&P 500 came within 0.5% of a new high, and again this type of activity will trigger some selling, especially after what we saw at the September double top. A pause or dip is not a surprise here but at this point I don't see another September like response coming, at least not before the Fed meeting next week. Maybe afterward?

The selling continued after the bell yesterday as several earnings reports came in light or guided lower for the fourth quarter, including Texas Instruments, which may take a bite out of the recently hot semiconductor index. Today will be a heavy day for earnings reports with Microsoft being the most widely watched.

With the Fed on deck next week, Brexit, impeachment, trade negotiations, and earnings season in full force, the market has enough on its plate, yet it is hanging around the old highs, and that is a positive. The problem may come down the road when the inverted yield curve implications come to fruition but also, next year the market will start to price in the Democratic primary front runner and their chances against President Trump. While there are a lot Trump haters out there, the stock market does like him, and it will not be happy if Elizabeth Warren is a major threat, which it appears she has become. They would prefer Joe Biden on the democratic side over Warren, so keep an eye on the polls once we get past that first list of catalysts to end this year.

The S&P 500 (C-fund) came within about a half of a percent from hitting the prior highs yesterday morning before fading hard in the final hour of trading on Tuesday. It may turn out to be a Turnaround Tuesday as we see the resistance line coming off the prior peaks. There is that open gap down by 2950 and that's always a possible downside target. I don't believe the 200-day EMA will get tested again this year so I will be counting on any pullback to be minor. Next year may be a different story, as I have been saying.

The S-fund has come a long way since the lows earlier this month and depending how thick your crayon is, the descending resistance line may have been hit already and that would be a good reason for a pause. But as I had said the other day, a continued rally would the "pain trade" and the market likes to deliver punishment to the most it can, so I won't be surprise if any dip is a quick one, despite the open gap.

The Dow Transportation Index continues to tear it up adding another 0.90% yesterday, but it too is nearing the top of its range and faces some serious resistance. While the S&P and small caps were making negative reversals yesterday, the market leading Transports made a positive reversal.

The EFA (I-fund) had another attempt at a breakout yesterday, which failed. The dollar was not on its side as it was up about a quarter of a percent, weighing on the I-fund's index. This is a nice looking chart but perhaps some digesting of recent gains is to be expected.

AGG (bonds) flirted again with that precipice support line and 50-day EMA. It's holding on and may hold on if stocks do decide they need to pull back. But if stocks can rally and we start seeing some breakouts to new highs as many of the equity index charts are trying to do, then we may see more money move out of bonds and into stocks for the final two month of the year.

Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to:

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

Tom Crowley

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