Breakout

After trading in a tight trading range for weeks, investors jumped on the better than expected ADP employment report, breaking through the recent resistance.  The Dow gained 250-points on the day, while the major indices gained 2% to 3%.

For the TSP, the C-fund jumped 2.18% on Wednesday, the S-fund gained 2.06%, the I-fund rallied 2.70%, and the F-fund (bonds) dropped 0.65%.  

The S&P 500 was dealing with two overhead resistance areas that appeared to strong enough to hold it back from any rallies, but yesterday the bulls stepped up and cut through those resistance levels like a hot knife through butter.  I had expected another test of the 50-day EMA to fail, but instead, the S&P moved higher without another test.

With the breakout, the chart looks better now as the S&P is back within the ascending trading channel.  We talk a lot about wanting to see 3 to 5 closes above resistance or below support (or primary EMA's)  before confirming the breakout.  The S&P has been moving above and below that lower end of the ascending trading channel, and after 3 consecutive closes below it recently, I thought the break was going to be to the downside, but the humbling market decided to do its own thing.  It's funny that way.  The market always seems to be right.


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

The breakout above the descending resistance line, and the 1200 level is a very positive move.  We might want to be cautious because this is just day one of the breakout, but the fact that it climbed back into a longer-term trend, and back above the 20-day EMA after the 50-day EMA held, tells us there may be reason to be optimistic.  But that all hinges on the S&P remaining above those support levels.

We have seen some sharp moves out of pullbacks like this a few times already this year (red arrows in chart above), and in those previous instances it was a good time to jump on board, but it seems like every time we see a pattern, the opposite happens the next time.  So, I do have some skepticism about this breakout, but I also have enough interest to not want to miss out completely. 

Another reason to be optimistic?  The market leader Dow Transports, made a higher high.  If the followers can do their job, we should see a similar breakout in them.

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

As we have been saying, the dollar seems to have broken its downtrend and easily cut through the 200-day EMA, which is bullish (for the dollar), but I decided to take a look at the 200-day Simple Moving Average (SMA - which is calculated differently than the EMA) to see if there were any warnings for yesterday's decline.  Many traders and investors use both the 200-day SMA and EMA so when a stock or index trades close to one, you want to check out the other just in case. 
                        
                       Charts provided courtesy of www.decisionpoint.com, analysis by TSP Talk

It turns out that the reversal came just below the 200-day SMA .  We'll want to keep an eye on both since the EMA seems to have acted as support during yesterday's pullback, while the SMA is still acting as resistance.


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

I posted this on the message board yesterday to show something very interesting.  We know that 10-day MA of the OEX put/call ratio moved down to levels not seen in many years, and that is usually a bearish sign for stocks.  But on Monday and Tuesday of this week, the daily OEX put/call ratio shot up to one of the highest (most bullish) one day readings in 20-years.  
                        
                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The daily moves don't have much of an effect of the longer-term direction of the market, but they do sometimes tell us when a sharp short-term move in the market is coming.  I just found it very interesting that we got a much better than expected ADP employment report a day after the daily reading hit that 20-year high.  It's as if the smart money knows before the rest of us sheep.  Color me suspicious.

I am getting suspicious of a lot of things these days.  I always wonder if moves like this are manufactured to get the sheeple to jump back in the market, only to have the rug pulled out from under us again.  But that's conspiracy theory stuff. 

What is not a conspiracy, but something we talk about here often, is that the market itself is a leading indicator.  Sure, we see big moves after a surprise report or news event, but in general, the market goes up before the evidence of economic improvement is reported. 

The market has been rallying most of this year and all of last year.  That told me that the economic data was likely going to be good.  But, that goes both ways.  Suppose in the spring we start seeing some poor economic data again.  Does that mean the market will go down in the spring?  It might, but it would probably start moving down much earlier.  So, if the market is going up for extended periods of time, expect good news to follow.  If the market is going down, expect bad news to follow.  It's the opposite of what you might think, and its why many new investors lose money in the market.

Thanks for reading!  We'll see you back here tomorrow.