TSP Talk – Stocks about to break down

It was another wild ride for Wall Street during a holiday shortened week. On Tuesday stocks sold off sharply early, but a nice reversal helped turn a 300-point loss into a 100-point loss by the close. Wednesday saw a huge, nearly 300-point, follow-though rally, but things just went south again on Thursday and Friday.

After all was said and done, the week wasn’t too bad for the U.S. stocks funds as the C-fund lost 1.64%and the S-fund fell 1.08%, but the rally in the U.S. dollar really hurt the I-fund and it closed down 5.63% last week. Bonds (F-fund) gained 0.17%, and the G-fund was up 0.04%.

The returns for the month of September are reminding us of the August carnage. The C-fund is now down 5.26% for the month, the S-fund has lost 6.03%, the I-fund has fallen 8.58%, the F-fund is up 0.95%, and the G-fund has added 0.05%.

We showed this bear flag last week but the difference this week is that an attempt to move back to the top of the flag failed this week, and that makes it more likely that this test of the lower end of the flag will fail, and we will likely be seeing a move to test the old lows between 1100 and 1120.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

While fear will be high and the swings wild, I will be looking for a spot to be a buyer once we get in that area. We could see a break below the old August lows, but that will likely be a capitulation—like panic, and we can probably get a good bounce from there. I do expect the volatility to continue as the S&P 500 will likely consolidate in the 1100 – 1225 area for a few more weeks or months.

The dollar has been the beneficiary of a weakening European economy as the probability of a default in Greece becomes more apparent, and it probably won’t stop in Greece. Spain, Portugal, Ireland, and Italy are also facing bleak debt issues.

Chart provided courtesy of www.decisionpoint.com,analysis by TSP Talk

We are seeing levels in the dollar not seen since last March. When the dollar rallies, anything that is traded in dollars, like oil and other commodities, and of course stocks, loses some value (in dollars) as it takes fewer dollars to buy them, and that is adding pressure on U.S., and in particular,international stocks, for those buying with U.S. dollars.

For this week I am anticipating a possible test of 1120 or even 1100. I don’t expect everyone to attempt to be a hero and try to catch the bottom because it can be very dangerous in this kind of market environment, but I would not be surprised if we see a decent rally by the end of the week, or into next week if we do test the lows. But I also expect to see the lows get tested a few times into October so it will probably be a trader’s market for the next several weeks.

Good luck, and thanks for reading. Our market commentary is updated every morning on TSPtalk.com.

Tom Crowley
Weekly Wrap-Ups Archive
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