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Market Comments

May 11, 2011

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Patterns overrule indicators

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Stocks rallied yesterday as we continue to see a classic formation play out perfectly. The Dow gained 75-points on the day.

For the TSP, the C-fund gained 0.81% yesterday, the S-fund was up 1.25%, the I-fund picked up 0.48%, and the F-fund (bonds) lost 0.21%.

When chart patterns are working, sometimes you don't even bother with the indicators, and this one is working...

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

The concern is still the open gap near 1315 but it looks like it won't get filled in the short-term, but I would not rule out it being filled in the coming weeks or months. As a matter of fact I think we can count on it happening some time this spring / summer, but for now, let's let this inverse head and shoulders play out. We will likely see new highs in the major indices pretty soon.

The Nasdaq is insync with the S&P 500 as its pullback found support at the old resistance and there is a large gap still open.

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

The Dow Transportation Index did not form an inverse head and shoulders pattern but we are seeing a typical breakout followed by a test of the old resistance, and the start of a new leg higher. It's all pretty good.

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

Looking for some negatives, the smart money of the OEX put/call ratio is back near the extremely bearish reading and this could indicate that they are preparing themselves for a summer swoon at some point.

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

The dollar remains in the spotlight as its recent rally ran into resistance and has pulled back since. The 50-day EMA also acted as resistance and however this plays out may determine how long this stock market rally can last.

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

For now, this is a typical rally in a bear market for the dollar and until this trend is broken convincingly, we should treat is as just that and expect it to go lower. Should we see it move back above the trendline and the 50-day EMA, we will probably want think more defensively in regards to the C, S and I-Funds.

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

Click here to discuss today's Market Commentary Tom Crowley

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