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| Today's Commentary (Short Term Outlook) |
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Overbought but looks OK Stocks took a little break yesterday after a sharp rally out of the bear flag. After four consecutive positive days, the Dow lost 18-points. The Nasdaq dropped less than 2-points after being up for 6 consecutive days. For the TSP, the C-fund was down 0.10%, the S-fund was up 0.03%, and the I-fund played a little catch-up after Friday's late rally in U.S. stocks, by gaining 0.42%. The F-fund was up 0.08%. The S&P 500 is overbought after rebounding off of that 200-day EMA a couple of weeks ago. I would not be surprised to see the market take a little break here, but now that the S&P (1108) is back above the 50-day EMA (1098) I would expect, and hope, that it can hold above it here rather than give us whipsaw signals.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk The 20-day EMA had crossed below the 50-day EMA during the correction, and we'd really like to see it get back above it. That would be another green light for us. It is a lot to look at, but let's take a look at the charts between late 2006 and early 2008. The action during February to April 2007 is very similar to what we are seeing today. The market came off a high, and after a correction and a pullback, where the 2nd low hit the 200-day EMA and reboundsed the S&P 500 shot back up. The 20-day EMA had crossed below the 50-day EMA, but within weeks it crossed back above. From there we saw another two to three months of upside action, taking the S&P to a higher high. 
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk Again in September of 2007, the 20-day EMA moved back above the 50-day EMA after dropping below it several weeks before. That preceded another strong rally in the S&P. We saw the 20 cross below the 50 again in November of 2007, but it never made it back above it, and in January of 2008, we got the official signal that a bear market was starting when the 50-day EMA crossed below the 200-day EMA. This tells me that we could very easily get a few more weeks (at least) of continued upside action, but if the S&P 500 moves back below the 50-day EMA, or the 20-day EMA can not get back above the 50-day EMA in the coming days, we will have our warning sign, and wll need to rethink the bullish case. A quick look at the NYSE overbought/oversold indicator shows us that we could see a day or so of sideways to downside action to take it off of the overbought levels, but a strong market does not always move down when it is overbought.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk Remember, I am talking about trades here, and not investments. Everything I mentioned about 2006 to 2008 preceded the terrible bear market of 2008 where many indices lost 50% or more of their value. That could very well happen again for all we know, so right I am trading what I see. Everything can change in a blink of an eye if the technical picture changes. Thanks for reading. We'll see you back here tomorrow. Tom Crowley |