Stocks were very choppy on Friday as the indices flirted with overhead resistance making the closing prices a possible a sign of things to come. Perhaps that's making more of the technical situation that it is, but you'll see in the charts below what I am talking about. The Dow gained 153-points and the S&P 500 was up 0.51%, and all of those gains came in the final 30 minutes or so of trading as both were in negative territory just before that late rally. Small caps and the I-fund also rallied late but they didn't make it into positive territory by the close like the S&P 500 did.
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Trading volume wasn't all that high and it was actually the lowest of the year so far for the S&P, so I am wondering what it meant. Was it short covering before the weekend? Was it big or smart money buying while many had gone home early for the weekend? Was it a trap to get mom and pop to jump back in after reading their weekend newspapers about how the market is coming back?
The first impression is that it was bullish and any algorithms that may be triggering off of that average, may turn from bearish to bullish. But it could have also been a fake out to get the masses to lean the wrong way.
I may be making too much of that, but here's the weekly chart and we can see that the current level is an important juncture here as well. The S&P closed above both the 50-week EMA, and the 40-week SMA, both of which are highly followed by technicians. We've also seen a break above the descending trading channel (blue) recently, and now some key moving averages, but perhaps there is one more obstacle to climb as the close on Friday pushed right up to the early September high, which may have some significance as the left shoulder of a head and shoulders pattern.
Here's a zoomed in view of that head and shoulders formation. Now, head and shoulders patterns can be tricky. They are considered continuation patterns. In other words, if the chart has been trending up and then creates a head and shoulders pattern, it is more likely to break to the upside. In a downtrend, they are poison and almost always break down. Being that this large, 8-month long, head and shoulders pattern started after a bullish run from 2021, this may be setting up for a break to the upside. The caveat is, very large head and shoulders patterns can also become topping formations. So, it really is still up in the air, and the H&S argument can be made by both the bulls and the bears at this point.
One more possibly negative take is that the right shoulder may just be peaking now. You can see how clean the left shoulder was: There was a move up to the top of the shoulder, and an almost equally sized move to the bottom again. This right shoulder is a little more messy, and we could see it move back to the neckline just to complete the shoulder. That should make it clear as mud now, don't you think? I know... I'm not helping.
The Yield on the 10-year Treasury and the price of oil are two very good reasons why we might expect the next move to be lower, unless the market has already priced in a yield above 2.5% and $130 oil because that's where it looks like these charts are going.
It may very well have priced that in with the recent correction, but neither of those two charts above are getting any better yet. In fact, they look to be getting worse. What happens if yields go to 3% and oil moves toward $140? That seems more likely than 2% and below $100, especially with oil as we head into the summer driving months.
We will get the jobs report Jobs report on Friday and they are looking for a gain of about 500,000 jobs, and an unemployment rate of 3.7%. Those are impressive numbers if we get them, but maybe too good in the face of a Fed who is on a mission to raise interest rates, and this data would give them a green light to keep tightening.
The stock market is a lot smarter than us and for the most part it is a forward looking indicator generally looking down the road and not at the rear-view mirror data that we often get like economic reports. If stocks continue higher despite all the headwinds that I have underscored, then perhaps the good news is just out our view and coming down the road. If stocks instead roll back over, we can probably assume that the interest rate hikes and the added "tax" of higher oil prices are going to continue to weigh on the economy.
We hit on the S&P 500 (C-fund) chart above so let's go right to the DWCPF (small caps / S-fund) chart. It looks like a nice bull flag forming, but the problem is that bull flags just haven't been working this year. And like in December of last year, there was a small open gap (blue) that gave us a clue that it may need to go down and fill that gap before a bull flag can break out. Of course the law of averages could also be in play here and eventually a bull flag will break to the upside as the tend to do.
The EFA (I-fund) is also in a bullish flag but it has been pinned below that 50-day EMA for several days adding a little more resistance to the top of that flag. There's also a more meaningful (larger) open gap below on this chart. It's also below the descending resistance line and the rising support line was just broken, so there are some issues here.
BND (Bonds / F-fund) got clobbered again as the "due for bounce" bond market continues to remain in its downtrend as yields continue to rise.
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
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
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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Last week had a very negative historical record, being the week following March's quadruple witching expiration. It certainly wasn't "very" negative, but it was mixed with the C, S, and I funds returning +1.81%, +0.06%, and -0.50% respectively.
The difference between a tentative close below resistance on Friday, and a potentially bullish close above that resistance happened in the last half hour of trading on Friday. With about 30 minutes to go in the trading day, the S&P 500 (SPY) had just given back the day's earlier gains and was on the verge of closing negative and below a key moving average. But look what happened in those final minutes of trading on Friday.
There's nothing magical about that orange moving average, which happens to be the 86 day simple average - or about 4 months of daily action, but for whatever reason the S&P 500 has used this area as a make or break point in recent months. 30 minutes before the close the S&P 500 was trading below that average, and that would have made 3 failed breakout attempts last week, but instead there was a late spike higher into the close, and that not only changed a negative reversal candlestick into a positive one, but it also closed above that seemingly important moving average.
The difference between a tentative close below resistance on Friday, and a potentially bullish close above that resistance happened in the last half hour of trading on Friday. With about 30 minutes to go in the trading day, the S&P 500 (SPY) had just given back the day's earlier gains and was on the verge of closing negative and below a key moving average. But look what happened in those final minutes of trading on Friday.
There's nothing magical about that orange moving average, which happens to be the 86 day simple average - or about 4 months of daily action, but for whatever reason the S&P 500 has used this area as a make or break point in recent months. 30 minutes before the close the S&P 500 was trading below that average, and that would have made 3 failed breakout attempts last week, but instead there was a late spike higher into the close, and that not only changed a negative reversal candlestick into a positive one, but it also closed above that seemingly important moving average.
Trading volume wasn't all that high and it was actually the lowest of the year so far for the S&P, so I am wondering what it meant. Was it short covering before the weekend? Was it big or smart money buying while many had gone home early for the weekend? Was it a trap to get mom and pop to jump back in after reading their weekend newspapers about how the market is coming back?
The first impression is that it was bullish and any algorithms that may be triggering off of that average, may turn from bearish to bullish. But it could have also been a fake out to get the masses to lean the wrong way.
I may be making too much of that, but here's the weekly chart and we can see that the current level is an important juncture here as well. The S&P closed above both the 50-week EMA, and the 40-week SMA, both of which are highly followed by technicians. We've also seen a break above the descending trading channel (blue) recently, and now some key moving averages, but perhaps there is one more obstacle to climb as the close on Friday pushed right up to the early September high, which may have some significance as the left shoulder of a head and shoulders pattern.
Here's a zoomed in view of that head and shoulders formation. Now, head and shoulders patterns can be tricky. They are considered continuation patterns. In other words, if the chart has been trending up and then creates a head and shoulders pattern, it is more likely to break to the upside. In a downtrend, they are poison and almost always break down. Being that this large, 8-month long, head and shoulders pattern started after a bullish run from 2021, this may be setting up for a break to the upside. The caveat is, very large head and shoulders patterns can also become topping formations. So, it really is still up in the air, and the H&S argument can be made by both the bulls and the bears at this point.
One more possibly negative take is that the right shoulder may just be peaking now. You can see how clean the left shoulder was: There was a move up to the top of the shoulder, and an almost equally sized move to the bottom again. This right shoulder is a little more messy, and we could see it move back to the neckline just to complete the shoulder. That should make it clear as mud now, don't you think? I know... I'm not helping.
It may very well have priced that in with the recent correction, but neither of those two charts above are getting any better yet. In fact, they look to be getting worse. What happens if yields go to 3% and oil moves toward $140? That seems more likely than 2% and below $100, especially with oil as we head into the summer driving months.
We will get the jobs report Jobs report on Friday and they are looking for a gain of about 500,000 jobs, and an unemployment rate of 3.7%. Those are impressive numbers if we get them, but maybe too good in the face of a Fed who is on a mission to raise interest rates, and this data would give them a green light to keep tightening.
The stock market is a lot smarter than us and for the most part it is a forward looking indicator generally looking down the road and not at the rear-view mirror data that we often get like economic reports. If stocks continue higher despite all the headwinds that I have underscored, then perhaps the good news is just out our view and coming down the road. If stocks instead roll back over, we can probably assume that the interest rate hikes and the added "tax" of higher oil prices are going to continue to weigh on the economy.
We hit on the S&P 500 (C-fund) chart above so let's go right to the DWCPF (small caps / S-fund) chart. It looks like a nice bull flag forming, but the problem is that bull flags just haven't been working this year. And like in December of last year, there was a small open gap (blue) that gave us a clue that it may need to go down and fill that gap before a bull flag can break out. Of course the law of averages could also be in play here and eventually a bull flag will break to the upside as the tend to do.
The EFA (I-fund) is also in a bullish flag but it has been pinned below that 50-day EMA for several days adding a little more resistance to the top of that flag. There's also a more meaningful (larger) open gap below on this chart. It's also below the descending resistance line and the rising support line was just broken, so there are some issues here.
BND (Bonds / F-fund) got clobbered again as the "due for bounce" bond market continues to remain in its downtrend as yields continue to rise.
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
For more info our other premium services, please go here... www.tsptalk.com/premiums.html
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
