The futures market heading into Tuesday was indicating that stocks were going to open slightly lower. That was before the CPI report was released and of course that changed everything. There was some buying in the final hour, but the damage was broad as large, small, mid-cap stocks were all sold despite the recent relative strength in small caps so the falling tide sunk all ships. The dollar and yields were up sharply, and that has been troublesome for stocks, particularly small caps, for some time.
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After Monday's disturbing negative reversal, the stock market finally relented and it took another inflationary data point to ring the bell. Now whether that was the bell ringing indicating a top or just a shakeout remains to be seen, but we all knew things were getting stretched and it was just a matter of time before we saw a pullback. In that case I am talking about the S&P 500 because the small caps and I-fund charts were looking rather promising, but they took a major hit as well yesterday.
The breakout on Monday looked very promising for small caps (DWCPF / S-fund), but it didn't hold and instead it is back in its bullish flag-like pattern with pending support at the 20-day EMA (green), the bottom of the flag near 1915, and then the 50-day EMA near 1900.
The stronger than expected CPI pricing data sent yields and the dollar soaring and, in hindsight, both charts were indicating that they could go higher. However, the strength in small cap stocks recently was occurring despite the strength in the 10-year yield, but that changed yesterday with that breakout to over 4.3%.
The dollar was up as well and it filled in another gap from all the way back in early November. It has been trending higher all year and perhaps it will test the prior high near 28.40, just before that November gap down. Then what? A double top pullback?
The recent outperformance in the small caps certainly had me excited that we could be seeing a shift out of the big tech led market into a broader market rally, but as I said, nothing survived yesterday's sell off. The losses were broad but the charts aren't broken yet. Maybe just a little shaken up. The question is, do you wait for the charts to break before selling, or do you hold this shake out?
The RSP is that Equal Weighted S&P 500 chart that we talked about yesterday. The chart doesn't look terrible but we have a clear failed breakout and the loss took this ETF all the way back to where it was... last Tuesday? So it wasn't that bad, but it lost 5 days worth of gains yesterday and the old adage is that stocks take the escalator up, and the elevator down.
The Russell 2000 broke above one resistance line last week, but yesterday it fell right back into that pennant formation. Pennant formations in an up trending market are bullish, but failed breakouts are not. The 50-day EMA is getting tested now and the bottom of the pennant is just below that, so whether this was a one day wonder on the downside may be revealed quite quickly.
Yesterday's wasn't the end of the bull market for stocks. It's too early to say. But if they don't turn back around quickly at some of the support levels, it could signal the beginning of the end.
The S&P 500 (C-fund) gave us a warning on Monday afternoon (after the IFT deadline) when there was a negative reversal day. Tuesday made a textbook follow up to that negative reversal thanks to the CPI report. The gap down means there is some room on the upside for a rebound, whether or not the peak is in. The 20-day EMA held as the S&P closed well off the lows after testing it. The trend is still up so the bull case isn't dead yet, but support needs to hold.
DWCPF (S-fund) also gapped down after the failed breakout. It's back in that flag formation after the breakouts (2 of them) failed but it's still above its 20-day EMA. Small caps have been acting well but if there's anything that could kill them, it would be higher rates and the Fed is now certainly not going to cut rates in March and, after that CPI data, maybe not in June either.
The EFA (I-fund) had a great looking inverted head and shoulders pattern formed. I showed the inverted H&S on the 10-year yield chart up above, and that one broke out to the upside as if drawn in a textbook. This one, not so much. Retesting the middle of the head of a head an shoulders pattern is always a possibility so the 73.50 area may be tested if the 50-day EMA doesn't hold.
BND (bonds / F-fund) took the worse case scenario approach after failing at the 50-day EMA yesterday. Not all is lost because, as we talked about yesterday, the bottom of the bull flag is still holding, so I guess it could be worse, or could get worse, if that fails. Otherwise the bull flag could hold and it could move back toward the top of it.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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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After Monday's disturbing negative reversal, the stock market finally relented and it took another inflationary data point to ring the bell. Now whether that was the bell ringing indicating a top or just a shakeout remains to be seen, but we all knew things were getting stretched and it was just a matter of time before we saw a pullback. In that case I am talking about the S&P 500 because the small caps and I-fund charts were looking rather promising, but they took a major hit as well yesterday.
The breakout on Monday looked very promising for small caps (DWCPF / S-fund), but it didn't hold and instead it is back in its bullish flag-like pattern with pending support at the 20-day EMA (green), the bottom of the flag near 1915, and then the 50-day EMA near 1900.
The stronger than expected CPI pricing data sent yields and the dollar soaring and, in hindsight, both charts were indicating that they could go higher. However, the strength in small cap stocks recently was occurring despite the strength in the 10-year yield, but that changed yesterday with that breakout to over 4.3%.
The dollar was up as well and it filled in another gap from all the way back in early November. It has been trending higher all year and perhaps it will test the prior high near 28.40, just before that November gap down. Then what? A double top pullback?
The recent outperformance in the small caps certainly had me excited that we could be seeing a shift out of the big tech led market into a broader market rally, but as I said, nothing survived yesterday's sell off. The losses were broad but the charts aren't broken yet. Maybe just a little shaken up. The question is, do you wait for the charts to break before selling, or do you hold this shake out?
The RSP is that Equal Weighted S&P 500 chart that we talked about yesterday. The chart doesn't look terrible but we have a clear failed breakout and the loss took this ETF all the way back to where it was... last Tuesday? So it wasn't that bad, but it lost 5 days worth of gains yesterday and the old adage is that stocks take the escalator up, and the elevator down.
The Russell 2000 broke above one resistance line last week, but yesterday it fell right back into that pennant formation. Pennant formations in an up trending market are bullish, but failed breakouts are not. The 50-day EMA is getting tested now and the bottom of the pennant is just below that, so whether this was a one day wonder on the downside may be revealed quite quickly.
Yesterday's wasn't the end of the bull market for stocks. It's too early to say. But if they don't turn back around quickly at some of the support levels, it could signal the beginning of the end.
The S&P 500 (C-fund) gave us a warning on Monday afternoon (after the IFT deadline) when there was a negative reversal day. Tuesday made a textbook follow up to that negative reversal thanks to the CPI report. The gap down means there is some room on the upside for a rebound, whether or not the peak is in. The 20-day EMA held as the S&P closed well off the lows after testing it. The trend is still up so the bull case isn't dead yet, but support needs to hold.
DWCPF (S-fund) also gapped down after the failed breakout. It's back in that flag formation after the breakouts (2 of them) failed but it's still above its 20-day EMA. Small caps have been acting well but if there's anything that could kill them, it would be higher rates and the Fed is now certainly not going to cut rates in March and, after that CPI data, maybe not in June either.
The EFA (I-fund) had a great looking inverted head and shoulders pattern formed. I showed the inverted H&S on the 10-year yield chart up above, and that one broke out to the upside as if drawn in a textbook. This one, not so much. Retesting the middle of the head of a head an shoulders pattern is always a possibility so the 73.50 area may be tested if the 50-day EMA doesn't hold.
BND (bonds / F-fund) took the worse case scenario approach after failing at the 50-day EMA yesterday. Not all is lost because, as we talked about yesterday, the bottom of the bull flag is still holding, so I guess it could be worse, or could get worse, if that fails. Otherwise the bull flag could hold and it could move back toward the top of it.
Thanks so much for reading! We'll see you back here tomorrow.
Tom Crowley
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
Daily Market Commentary Archives
To get weekly or daily notifications when we post new commentary, sign up HERE.
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.
