Support and seasonality vs. the negative stuff

Stocks were rocked yesterday as the Dow shed 132-points and we saw pretty big losses in the TSP stock funds.  The S-fund lost 1.05%, the C-fund was down 1.18%, and the I-fund dropped 2.26%, getting hurt by another strong day for the dollar.  The F-fund was up 0.45% as investors looked for safety.
 
The consolidation in the S&P 500 continues and it is coming to an apex that should break one way or the other, very soon.  It is now at the bottom of the rising wedge, normally a negative pattern that breaks to the downside, but there are also reasons to believe this could just as easily break to the upside.  Being at support now ("A" below), we could get our answer any day.

Some of those bullish reasons are the fact that the S&P is still trading above the 50-day EMA, and the 20-day EMA is above the 50-day EMA, and the 50-day EMA is above the 200-day EMA - and all three are still rising.  Even if the wedge does break down, there is more support at 1083 ("B" below - the 50-day EMA and the bottom of the trading channel), and the longer-term lower trading channel near 1050 ("C") - although that is a quite a way down from where the S&P trades now.
                   
                  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The market leader, Dow Transportation Index also pulled back, but remains above the breakout level and seems to have found support.  It will be important for it not to slip much further from here, and 4050 is still a pretty important level to hold.

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

The Nasdaq has really been chopping around leaving open gaps all over the chart, but the uptrend remains intact and hopefully the positive technology stock earnings that came out after the close yesterday will keep it from breaking that support.

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


On Monday we said that we would not be surprised to see the dollar move up to the 200-day EMA, but who would have thought it could happen in less than a week?  It's not quite there yet, but...


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

The dollar's rebound continues to put pressure on stocks, particularly the I-fund, but when the dollar can rise while stocks rise, we may have something.  That would be a sign that the economy is strengthening and that stocks don't need the dollar to go down for them to go higher, which is what was happening for most of 2009.

This week's TSP Talk Sentiment Survey came back quite bullish despite yesterday's big sell-off.  That's a little surprising to me, and a little concerning.  The 2.42 to 1 bulls to bears ratio tops last week's 2.21 to 1 ratio, and its the highest since December of 2007.
    
                         

A ratio in the 2 to 1 range is bullish of course, but not overly extreme historically, and we are getting mixed messages from other surveys.

The AAII survey came in at 1.50 to 1, which is high for this year, but historically it is just a neutral reading.  We saw similar readings over the summer and they didn't cause much damage.  Historically this survey has had some very bullish readings hitting 3 to 1 and 4 to 1 several years back, as you can see in the monthly portion of the charts below.

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

The Investor's Intelligence Advisor Sentiment Survey is over 3 to 1 bulls to bears.  This one is getting extreme.



We have only had a few other 3 to 1 ratios in the last 5 years...

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

This, and the fact that our TSP Talk survey is at a two-year high ratio on a day that saw the Dow drop 132-points, could be an indication that we are getting a little too complacent - which is a concern for stocks going further.

As I mentioned above, some of the major indices have fallen to short-term support levels that "should" hold, particularly because of the strong seasonal bias we are heading into, but if it doesn't hold today, that could be a warning sign for next week.  I will keep the seasonality data that I posted yesterday down below today's commentary.

Thanks for reading.  Have a great weekend!

Tom Crowley
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Here is that Christmas holiday data chart again.  The strongest stretch comes between Christmas and New Years. 
  

... and here is the December chart.  Today is the 13th trading day of the month, and there is nothing but green ahead, although the next two days (days 13 and 14) have actually been down more often than up.

                          Charts provided courtesy of www.sentimentrader.com

Even last year, one of the worst years for the stock market ever, the S&P 500 was up 3.63% in the last 6-trading days of December.  The last 7-days were up just 1.73% because of a 1.83% loss on December 22, 2008.



The first few days of January also have a positive bias, but it is less reliable.  The S&P 500 was down 8.4% last January, but was up 3.16% on January 2, the first trading day in 2009.  January can be dangerous and I am a little worried about January 2010.

Here is a history of the final two trading days in December and the first three in January for the last 13-years.


                                 
I don't have too much to say about it, so if nothing else, it may help you make your decision for the next week or two of trading.