Stocks tried to rally after the jobs report was released on Friday, from some deep pre-market futures losses, but the fleeting early gains gave way to another round of selling. Buyers stepped up in mid-afternoon trading, but could not hold on into the close. The Dow lost 70-points but the losses in the broader indices were not really significant. Bonds rallied.
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The jobs report actually came in slightly weaker than expected but investors didn't mind that because weak employment or economic data might discourage or delay the Fed from raising interest rates. We've been in that bad is good mode for a few years now.
We are seeing possible signs of a market breaking down but the indices are quite oversold and could see a relief rally early this week. The question will be whether investors are now in the mode of selling rallies instead of buying the dips. Traders will have opportunities to buy and sell in a volatile market like this, but investors may need to decide if they want to get more defensive, or ride out a possible correction.
The SPY (S&P 500 / C-fund) has now closed below the 50-day EMA for two straight days so the 3 to 5 day rule is in effect. That is, we give any breakdown (or breakout) 3 to 5 days to confirm the move. The spinning top candlestick is considered a reversal formation so there is some hope for the bulls that the worst may be over, but clearly the character of the market has changed compared to the quiet rise of the prior 3+ months.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
As I showed in the Weekly Wrap Up this weekend, the S&P 500 is testing the support from the longer term rising trading channel now and, while we don't want to say the bull market is in jeopardy, the rising trend is.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
And while the S&P 500 has maintained its rising trend, the small caps of the Russell 2000 broke down several months ago and has lagged and not been able to breakout to new highs since it peaked in late February / early March, so these breakdowns do have meaning. (Notice that the breakdown in January closed above the support line and the rally continued. That's why we need to see at least 3 closes below support before declaring a trend dead.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Wilshire 4500 (S-fund) came close to testing its intermediate-term support line (orange) and 200-day EMA (blue), while testing and holding the support line of the new descending trading channel (red).
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The dollar has spiked dramatically since bottoming in late June. We saw it drop on Friday, filling an open gap, but it closed strongly near the day's highs.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
That strength in the dollar has help put pressure on the I-fund as it fell precipitously from a bear flag last week. There is a large open gap (blue) that may look to get filled soon, but these breakdowns we are seeing all over the globe are certainly warning signs that things are changing.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The AGG (Bonds / F-fund) bounced off of the 50-day EMA last week while stocks were dropping, but it remains in the trading channel between 108.25 and 109.25 and the upside should be tested early this week.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
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Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
Posted daily at TSP Talk Market Commentary
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