TSP Talk Blog

The market... terrible. Economy... a mess. Sentiment... woeful. Maybe that means it's time for a little rally?

After Wednesday and Thursday's drubbing, stocks put together a huge rally in the last hour of trading on Friday after Obama selected Timothy Geithner as the new Treasury Secretary.



In a normal market environment, these type of Friday afternoon reversals tend to carry into Monday morning, but a large gap opening isn't usually a recipe for lasting gains. The market would be better off opening flat or slightly lower. If it does gap open higher, it would probably be best to see the gap filled before it moves higher again. It is a post-options expiration week, which gives it a negative bias. One thing is almost certain; volatility will be high so we should see the market change directions often this week.

The NYSE overbought/oversold indicator hit that -1500 level again after Thursday's trading, nearly matching the extreme oversold readings it saw in October. At least a short-term bounce is expected, and we saw the start of that late Friday.


Chart provided courtesy of www.decisionpoint.com

The S&P 500 rallied late on Friday but it did not quite get back all of the losses it incurred on Thursday. The overhead resistance is near the 840 level, then the 20-day moving average which is currently near 884.


Chart provided courtesy of www.decisionpoint.com

The MACD indicator may be better suited for this trending market, which we are in now, as opposed to the overbought/oversold indicators best used in an oscillating market. The MACD can sniff out divergences just before market turns.

When the MACD makes higher lows or higher highs, and the index is flat or moving lower, it is a divergence that can lead to high prices - marked "A1" above.

When the MACD makes is relatively flat and the index moving down, it is also divergence that can lead to high prices - marked "A2" above.

When the MACD makes lower lows or lower highs, and the index is moving higher, it is a divergence that can lead to lower prices - marked "B" above.

We just came out of a period of lower prices while the MACD is making a higher low - marked "A3" above. This is a divergence that can indicate that a short-term bounce is possible in the coming days/weeks.

The AAII Investor Sentiment Survey came in at 24% bulls, 57% bears, making a very bearish 0.42 to bulls to bears ratio. The last time we saw a reading that bearish was in July where we saw the S&P 500 rally for few weeks before the next leg down started.


Chart provided courtesy of www.decisionpoint.com

The Smart Money / Dumb Money Condidence indicator on www.sentimentrader.com saw the dumb money indicator move down to 13, near the all time lows. The smart money indicator moved above 70. When the smart money is above 60, and the dumb money is below 40, we usually have a decent short-term buying opportunity.


Chart provided courtesy of www.sentimentrader.com

Once agin, here is the Thanksgiving seasonality chart.


Chart provided courtesy of www.sentimentrader.com

Combine this data with the November seasonality chart below, and this is usually a pretty good week to be in stocks. But this is no ordinary year and sentiment would be pretty low on my list of indicators right now.

I know I am sounding bullish, but this is just for the short-term. We are in a big, bad bear market and caution and capital preservation should be at the top of your lists. Those looking to take on risk may have an opportunity. Those looking to play it safe, may not want to get involved, and I don't blame you. I don't see any reason to say we have seen THE bottom, but we still may see a little pop in the coming days or weeks. I would be a seller of any 10% to 15% rally.

That's all for today. Thanks for reading, and we'll see you tomorrow!