Stocks accelerated their downside pullback on Friday after peaking last Tuesday at some key moving averages. The Dow lost 292-points, and we saw 2% declines the Nasdaq and the small cap, while the C and I-funds lost about 1.3% each. Bonds also took a loss as yields have been continuing to rebound after a false breakdown. The recent strength in the dollar is certainly adding some pressure to stock prices.
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I know this isn't the most exciting part of investing or trading, but the dollar, yields, oil, and High Yield Corporate Bonds can tell us a lot about the state of the stock market. The dollar has been strong all year but we did get a month long pullback starting in early July and that helped stocks come off their 2022 lows. Now it appears to be back in business as it found support at the 50-day EMA, and is also back in the longer term rising channel (red) and eying those July highs again. There are a couple of open gaps below.
The Yield on the 10-year Treasury Note flirted with 3% on Friday after a good sized gain, and the head and shoulders pattern, which broke down briefly in late July, turned out to be a fake out, and we may be seeing a test of the head, which is a less likely outcome of an H&S pattern, but not completely uncommon.
This is what typically happens to a head and shoulders pattern. After forming a right shoulder, the fourth test of the neckline fails and we get a breakdown, with perhaps a relief rally back to the neckline before the downside resumes.
This is another potential outcome of an H&S where the neckline holds after the right shoulder, but then it moves back up near the middle of the head - then fails.
Why it would do any of these moves depends on a lot of things. Higher yields can be an indication of better economic data, but higher yields can also be a competitor to the stock market, especially when stocks are falling. The recent bear market rally was certainly helped by yields falling from 3.5% in June to about 2.5% earlier this month, so getting back to 3% may have investors concerned.
The price of oil also peaked in June and has plunged almost $40 a barrel since, but three positive days in a row has it knocking on the overhead resistance door. A move to $95 may be tolerated as the 200-day EMA and the 200- MA (not shown) are basically in the same spot (24 cents apart.)
If we start to see $100 again in the coming weeks, and the yield on the 10-year T-note has a 3 handle in front of it, I would look for the stock market to continue to rollover. If the opposite happens and oil moves below $90 and yields hang near or below 3%, stocks may continue their rebound off the lows.
The S&P 500 (C-fund) has backed off the 200-day moving average but that looked like a convenient place for some backing and filling after the tremendous run off the lows. It impressively blew right past the 200-day EMA several days before that, and now it may be coming back to test that area again, which is at 4190. There is a lot of support and resistance around and traders will likely have a battle at each one of them, while the winner of the war gets determined by whether we see new lows this year or not.
The weekly S&P 500 chart found support at the 200-week EMA (blue) in June, and if we went back several more years you will see that often major declines will rebound off of that level. The COVID crash was an exception. But now it is up trying to test the 40-week moving average, another meaningful area on the weekly chart. When it holds, it holds, and when it breaks, the flood gates seem to open. Last week it held.
The DWCPF (S-fund) failed at its 200-day EMA, so that's the road block to watch going forward, and the next support test would come near 1765, which is just 20-points below Friday's close. 1725 would be the 50-day EMA, and that's always possible in a pullback, but whether they hold or not will likely give us our answer whether the bear market is over or not.
EFA (I-fund) is going to struggle when the dollar is rallying like it has been over the last week or two. Technically, it has had the habit of moving just above the 50-day EMA, then rolling over and failing at that level. On Friday it closed back below the 50-day EMA for the first time since July 26.
BND (Bonds / F-fund) has been pulling back as yields move higher. We have an inverted head and shoulder pattern completed here, but no confirmed breakout. Now we see what could be the handle of some kind of a cup and handle formation. It looks bullish for bonds, but it's tough to say especially with the Fed raising rates and the economy getting sluggish because of the rate hikes. Right now bonds are moving with stocks, for the most part, but that is not always the case so it's not something to rely on.
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. I appreciate it. 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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I know this isn't the most exciting part of investing or trading, but the dollar, yields, oil, and High Yield Corporate Bonds can tell us a lot about the state of the stock market. The dollar has been strong all year but we did get a month long pullback starting in early July and that helped stocks come off their 2022 lows. Now it appears to be back in business as it found support at the 50-day EMA, and is also back in the longer term rising channel (red) and eying those July highs again. There are a couple of open gaps below.
The Yield on the 10-year Treasury Note flirted with 3% on Friday after a good sized gain, and the head and shoulders pattern, which broke down briefly in late July, turned out to be a fake out, and we may be seeing a test of the head, which is a less likely outcome of an H&S pattern, but not completely uncommon.
This is what typically happens to a head and shoulders pattern. After forming a right shoulder, the fourth test of the neckline fails and we get a breakdown, with perhaps a relief rally back to the neckline before the downside resumes.
This is another potential outcome of an H&S where the neckline holds after the right shoulder, but then it moves back up near the middle of the head - then fails.
Why it would do any of these moves depends on a lot of things. Higher yields can be an indication of better economic data, but higher yields can also be a competitor to the stock market, especially when stocks are falling. The recent bear market rally was certainly helped by yields falling from 3.5% in June to about 2.5% earlier this month, so getting back to 3% may have investors concerned.
The price of oil also peaked in June and has plunged almost $40 a barrel since, but three positive days in a row has it knocking on the overhead resistance door. A move to $95 may be tolerated as the 200-day EMA and the 200- MA (not shown) are basically in the same spot (24 cents apart.)
If we start to see $100 again in the coming weeks, and the yield on the 10-year T-note has a 3 handle in front of it, I would look for the stock market to continue to rollover. If the opposite happens and oil moves below $90 and yields hang near or below 3%, stocks may continue their rebound off the lows.
The S&P 500 (C-fund) has backed off the 200-day moving average but that looked like a convenient place for some backing and filling after the tremendous run off the lows. It impressively blew right past the 200-day EMA several days before that, and now it may be coming back to test that area again, which is at 4190. There is a lot of support and resistance around and traders will likely have a battle at each one of them, while the winner of the war gets determined by whether we see new lows this year or not.
The weekly S&P 500 chart found support at the 200-week EMA (blue) in June, and if we went back several more years you will see that often major declines will rebound off of that level. The COVID crash was an exception. But now it is up trying to test the 40-week moving average, another meaningful area on the weekly chart. When it holds, it holds, and when it breaks, the flood gates seem to open. Last week it held.
The DWCPF (S-fund) failed at its 200-day EMA, so that's the road block to watch going forward, and the next support test would come near 1765, which is just 20-points below Friday's close. 1725 would be the 50-day EMA, and that's always possible in a pullback, but whether they hold or not will likely give us our answer whether the bear market is over or not.
EFA (I-fund) is going to struggle when the dollar is rallying like it has been over the last week or two. Technically, it has had the habit of moving just above the 50-day EMA, then rolling over and failing at that level. On Friday it closed back below the 50-day EMA for the first time since July 26.
BND (Bonds / F-fund) has been pulling back as yields move higher. We have an inverted head and shoulder pattern completed here, but no confirmed breakout. Now we see what could be the handle of some kind of a cup and handle formation. It looks bullish for bonds, but it's tough to say especially with the Fed raising rates and the economy getting sluggish because of the rate hikes. Right now bonds are moving with stocks, for the most part, but that is not always the case so it's not something to rely on.
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. I appreciate it. 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.
