Stocks rallied strongly on Friday as the Dow jumped 186-points and the broader U.S. indices picked up about 1%. It seems like a case of 'sell the rumor, buy the news' as the geopolitical events reached a crescendo when we announced airstrikes against Iraq on Thursday night.
We saw Russia amassing an army at the Ukraine border and the recent cease-fire was running out in Gaza, and it seemed like it was a great excuse for stocks to tumble. Instead, we saw the big rally. By the way, a new cease-fire has been proposed, for whatever that is worth.
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The I-fund was down after a big down day in Japan on Friday, and the upside acceleration in U.S. stocks came after the international markets had already closed, so I expect the I-fund to outperform today.
The SPY (S&P 500 / C-fund) looks to be trying to bottom after some very oversold readings, but the S&P has now closed below the 50-day EMA long enough that getting back above it could be a tough task. There are open gaps above and below the current level and that adds to the strong case for both a rally and a decline from the current level. I'll show you both sides of the argument below.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
This longer-term chart of the SPY shows that the 100-day EMA has been a good source of support over the last couple of years. Any breakdown was quickly reversed going back to late 2012. Can that continue?
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The weekly chart shows that the rising trend is still intact and this would appear to be another buying opportunity - one that we've seen about a handful of times since late 2012. Of course if it breaks down, everything changes. We had one scare back in January but it was short-lived.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Russell 2000 (small caps) have been lagging badly breaking down from several key support areas since early July. These breakdowns are warning signs that should get our attention, but over the last few years we have become accustomed to ignoring the technical breakdowns as each one just led to another push higher. The bear flag in May is a good example of why we might ignore the current bear flag, but bear flags tend to break down, so how much should we really be ignoring it?
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The Russell 2000 did close back above the 200-day EMA on Friday, which is a good sign, but it has to hold. Then there's the 50-day EMA. If the Russell can rally up to the 50-day EMA it MUST get back above it, or else we risk duplicating what we've seen in Europe this summer, which I will show you in a minute.
The Wilshire 4500 (S-fund) has been able to hold above the 200-day EMA and the rising support line, but it is clearly in a short-term downtrend and trading below the 50-day EMA. This is either a great buying opportunity or, if we see a rally back to the 50-day EMA and it can't continue higher, could be a good selling opportunity. So this is no easy call.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
In early July we started talking about some of the cracks in the European stock markets. This is a chart of the France's CAC 40 I posted back in early July. It had fallen below the 50-day EMA and we saw a bear flag breakdown after it rested the 50-day EMA. That was a big warning sign and they were talking about recession back then.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Here's what's happened since:
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
The German DAX did the same thing. We saw a break in the rising trend as well as the 50-day EMA. It rallied back to retest the 50-day EMA. Then things went very wrong.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Technicians can't say they weren't warned and I believe our indices may be flashing those warning signs now. We are seeing the indicators show that we are oversold and we could still rally from here, but once we get back to the 50-day EMA on the S&P 500 and small cap indices, we better pay close attention to how stocks react.
This is one chart that has held on very well. The Nasdaq 100 (QQQ) has been able to hold above some key levels so if we're looking for a leader, this is it. If this breaks down, this bull market may be out of bullets. It may be a head and shoulders top.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
Bonds broke out on Friday, but reversed down hard when stocks started to rally. Whether the breakout area can now hold as support remains to be seen, but it is being tested right now so we should get our answer pretty quickly this week. This looks like a bullish chart, which would be bearish for stocks, but it turns into a failed breakout, we could get more relief in the stock market this week.
Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk
I think stocks can rally from here, maybe even strongly, but this could just be a test of some old support lines that broke down this summer. The bulls and the bears will likely get some opportunities during these late summer months. Mid-term election years tend to have below average results during the summer, but very bullish action in October and November. The buy and holders have been having their day in the sun (for years) but it may be time for traders / market timers to have the advantage as volatility may be picking up.
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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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