In yesterday's commentary I mentioned that the light volume trading we have been seeing in August could lead indices to be easily pushed around by a surprise economic report or news event, and yesterday we had double dose of bad news. 

The first was a higher than expected weekly jobless claims report.  The other was the Philly Fed's business activity index, which fell to negative 7.7 in August from positive 5.1 in July, well below the positive 7.0 expected by economists.  Subscribers to Scribbler's TSP & Economic report will likely get a better explanation than I have given.
        
For the TSP, the C-fund lost 1.69%, the S-fund dropped 2.05%, and the I-fund gave up 1.28%.  The F-fund (bonds) gained 0.24%.

The losses yesterday completes the short-term head and shoulders (H&S) pattern (in red) in the S&P 500, and is now testing the neckline.  We are seeing a series of head and shoulders patterns which make them more meaningful, but the longer-term (green) and shorter-term (red)  H&S's are bearish signs, and the one intermediate-term inverse H&S (blue) is generally bullish, so there are some mixed signals.  It's a bit convoluted, but the next thing to watch is for the neckline of the short-term H&S (red) to hold or breakdown.


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

We have been talking about the bear flag patterns that we have been seeing in the stock indices.  As we might expect from a bear flag, it broke to the downside.  It broke down on the S&P 500....

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

It broke down on the market leader Dow Transports, which lost 2.4% on the day and actually had to rally late to close back above the 200-day EMA.  As we mentioned yesterday the surprise in the economic data would be particularly influential on the low volume trading in the Transports, and that mid-day 3% move in the index certainly proved that to be true.  Can the 200-day EMA hold? 

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

The Nasdaq, another market leader, looks even worse than the Transports and S&P 500.  Its bear flag broke down as well, but it failed to make it back above any of the major EMA's.  This is not a good sign.

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

We also talked about the dollar being the catalyst for any breakout or breakdown and as we suspected stock indices and the dollar would break in opposite directions. 

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

It wasn't quite as pronounced as the stock funds, but the dollar clearly broke to the upside of its bullish flag formation.

Typically breaks in flag formations lead to further movement in the direction of the breakout, so I would expect more downside action in stocks, and more upside action in the dollar over the short-term.  Of course we can get rebounds, but with the 50-day EMA now less than 2-points above the 200-day EMA, we are on the cusp of another move into bear market territory as defined by the 50 and 200-day EMA's.  That would mean sell rallies, rather than buy dips.  It's not official until they cross, but it is getting close.

Thanks for reading!  Have a great weekend!

Tom Crowley