tocks opened higher on Friday morning, after a fairly "hot" jobs report met with an Apple earnings report that had investors concerned. It led to a strong open, but the rally faded rather quickly, something we saw a lot of in October, and it took a late bounce to close off the lows of the day. The Dow lost 110-points on the day and we saw modest losses across the board. The week was a good one for stocks despite the losses on Monday and Friday.
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Small caps held up fairly well posting just a small loss, and the I-fund rallied despite a rally in the dollar.
As you'll see in this year to date chart of the S&P 500, we had a nice run up off of last Monday's lows, but we had the 200-day EMA on our radar as a possible roadblock for any relief rally. As if it was a brick wall, that was the top of Friday's early rally and it felt like it was lucky that it did not fall further and fill that open gap near 2680. You can see that the 200-day EMA has been a key factor in prior pullbacks, ultimately holding up each time it was tested. The first move below it in October saw some buyers step in, but the second breakdown was more decisive, and now we're looking at a possible peak for this rally.
The rally off the February lows was much larger and perhaps the 200-day EMA will get recaptured after a temporary pause on Friday, but historically that 200-day average has been trouble in down trending markets.
The next couple of charts are looking more at the longer-term picture. In the short-term we could see many rallies, which can be explosive, and declines but the eventual picture will be drawn and while these charts below may be a little dramatic, the recent action has resembled the action of 2007 where the bull market eventually peaked prior to the devastating bear market of 2008 - 2009.
Let's compare the latter half of 2007 to what is happening now using the weekly charts...
In early October of 2007 the S&P 500 moved just above the old highs (A) to make a new all-time high (C). In between there was a move down to the 50-week average (B).
That new high (C) failed and that took the S&P down below the 50-week average (D).
That's about where we are now (D) if we are following that path this year. In 2007 there was another rally that took it back above the 50-week avg., eventually making a lower high at (E). Is that where it is heading next? That would be a decent move from Friday's close and not out of character for a bear market rally, IF it can get back over the 200-day EMA on the daily chart, but that's a big IF.
If we are going to see anything similar to that 2007 market, even if on a smaller scale, it took the S&P a year before things really unraveled and it wasn't until March of 2009 that it eventually bottomed.
So if this is going to play out, the recent weakness may be nothing compared to what may be coming. But while it is playing out, there will be plenty of good buying opportunities because the rallies can be explosive as we said. But until the S&P 500 can get back above the 200 and then the 50 day moving averages (on the daily chart down below) we may have to think about this as a possible scenario.
What would cause this? Inflation? Rising interest rates? Rising bond yields and cheap bond prices? An ongoing trade war with China? The democrats winning back congress and going after Trump, his tax cuts, and the deregulations? Something unknown yet?
I have no idea but again, this is one possible scenario looking at the charts.
The S&P 500 / C-fund had a nice run last week with three consecutive rallies of 1% or more, sandwiched between losses on Monday and Friday. The rally continued into Friday after the jobs report was released, but the buying hit a wall at the 20 and 200-day EMAs. So far the low looks like a possible "V" bottom but if that 200-day EMA resistance holds, we could see a test of those lows soon in which case we'd be talking about a "W" bottom possibility. But that's jumping the gun. It is certainly possible that stocks could bounce back above the 200-day EMA as it did in the 2007 chart up above. We still see some extreme indicators that might suggest that could happen. But either way, something has changed in this market and it doesn't look like we'll be racing up to new highs again like we did after February's correction.
The EAFE Index (I-fund) illustrates what can happen when the 200-day EMA fails. After successful tests of support in April and May, this index finally failed at the 200-day in June and it has not been able to recapture it after a few attempts. As we have mentioned with this chart many times, the bear market rallies have been quite strong, but so far they have all failed at the 200-day EMA. If the S&P chart above fails to recapture its 200-day EMA, is it destined to repeat a similar pattern as this one?
The DWCPF (S-fund) held up rather well on Friday but still gave up early gains to sustain a minor loss. The 50-day EMA is about to cross below the 200-day EMA, which is an intermediate-term warnings sign, but it can also mean a short-term oversold rally is due, although that's what we had last week. With the 200-day EMA all the way up near 1390, there isn't as much resistance here as we see in the S&P, but there is an open gap below 1320 that could be a draw.
The Dow Transportation Index ended the day flat but it too gave up big early gains on Friday after nearing some resistance. Watch that 10,400 - 10,500 area which looks like it could be trouble if this is turning into a bear market as it appears.
The yield on the 10-year Treasury Note broke to the upside of the bull flag that we've been watching, and the AGG (bonds / F-fund) broke down from its bear flag. That's technical analysis playing out very cleanly.
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: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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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Small caps held up fairly well posting just a small loss, and the I-fund rallied despite a rally in the dollar.
As you'll see in this year to date chart of the S&P 500, we had a nice run up off of last Monday's lows, but we had the 200-day EMA on our radar as a possible roadblock for any relief rally. As if it was a brick wall, that was the top of Friday's early rally and it felt like it was lucky that it did not fall further and fill that open gap near 2680. You can see that the 200-day EMA has been a key factor in prior pullbacks, ultimately holding up each time it was tested. The first move below it in October saw some buyers step in, but the second breakdown was more decisive, and now we're looking at a possible peak for this rally.
The rally off the February lows was much larger and perhaps the 200-day EMA will get recaptured after a temporary pause on Friday, but historically that 200-day average has been trouble in down trending markets.
The next couple of charts are looking more at the longer-term picture. In the short-term we could see many rallies, which can be explosive, and declines but the eventual picture will be drawn and while these charts below may be a little dramatic, the recent action has resembled the action of 2007 where the bull market eventually peaked prior to the devastating bear market of 2008 - 2009.
Let's compare the latter half of 2007 to what is happening now using the weekly charts...
In early October of 2007 the S&P 500 moved just above the old highs (A) to make a new all-time high (C). In between there was a move down to the 50-week average (B).
That new high (C) failed and that took the S&P down below the 50-week average (D).
That's about where we are now (D) if we are following that path this year. In 2007 there was another rally that took it back above the 50-week avg., eventually making a lower high at (E). Is that where it is heading next? That would be a decent move from Friday's close and not out of character for a bear market rally, IF it can get back over the 200-day EMA on the daily chart, but that's a big IF.
If we are going to see anything similar to that 2007 market, even if on a smaller scale, it took the S&P a year before things really unraveled and it wasn't until March of 2009 that it eventually bottomed.
So if this is going to play out, the recent weakness may be nothing compared to what may be coming. But while it is playing out, there will be plenty of good buying opportunities because the rallies can be explosive as we said. But until the S&P 500 can get back above the 200 and then the 50 day moving averages (on the daily chart down below) we may have to think about this as a possible scenario.
What would cause this? Inflation? Rising interest rates? Rising bond yields and cheap bond prices? An ongoing trade war with China? The democrats winning back congress and going after Trump, his tax cuts, and the deregulations? Something unknown yet?
I have no idea but again, this is one possible scenario looking at the charts.
The S&P 500 / C-fund had a nice run last week with three consecutive rallies of 1% or more, sandwiched between losses on Monday and Friday. The rally continued into Friday after the jobs report was released, but the buying hit a wall at the 20 and 200-day EMAs. So far the low looks like a possible "V" bottom but if that 200-day EMA resistance holds, we could see a test of those lows soon in which case we'd be talking about a "W" bottom possibility. But that's jumping the gun. It is certainly possible that stocks could bounce back above the 200-day EMA as it did in the 2007 chart up above. We still see some extreme indicators that might suggest that could happen. But either way, something has changed in this market and it doesn't look like we'll be racing up to new highs again like we did after February's correction.
The EAFE Index (I-fund) illustrates what can happen when the 200-day EMA fails. After successful tests of support in April and May, this index finally failed at the 200-day in June and it has not been able to recapture it after a few attempts. As we have mentioned with this chart many times, the bear market rallies have been quite strong, but so far they have all failed at the 200-day EMA. If the S&P chart above fails to recapture its 200-day EMA, is it destined to repeat a similar pattern as this one?
The DWCPF (S-fund) held up rather well on Friday but still gave up early gains to sustain a minor loss. The 50-day EMA is about to cross below the 200-day EMA, which is an intermediate-term warnings sign, but it can also mean a short-term oversold rally is due, although that's what we had last week. With the 200-day EMA all the way up near 1390, there isn't as much resistance here as we see in the S&P, but there is an open gap below 1320 that could be a draw.
The Dow Transportation Index ended the day flat but it too gave up big early gains on Friday after nearing some resistance. Watch that 10,400 - 10,500 area which looks like it could be trouble if this is turning into a bear market as it appears.
The yield on the 10-year Treasury Note broke to the upside of the bull flag that we've been watching, and the AGG (bonds / F-fund) broke down from its bear flag. That's technical analysis playing out very cleanly.
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: www.tsptalk.com/plus.php
Thanks for reading. We'll see you back here tomorrow.
Tom Crowley
Posted daily at www.tsptalk.com/comments.php
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.
