TSP Talk Blog

09/05/11

Stocks were down sharply early yesterday to the tune of about 250 Dow points, then nearly crawled back toward break-even by early afternoon, but the rebound failed and the indices tested the day's lows again. That would have been wild enough, but as the lows were being tested in afternoon trading, the buyers stepped up and the Dow shot up well over 300-points off of those lows to close up 153-points.


For the TSP, the C-fund gained 2.26% yesterday, the S-fund jumped 4.70%, the I-fundwas up 1.47%, and the F-fund (bonds) lost 0.27%.

There was positive news out of Europe that was the likely catalyst, but we know how that show has ended before (don't trust it). I am also leaning toward the side of believing that we saw a little capitulation. The midday rally failed terribly and by the time we were testing the lows again, and the Dow was down another 200+ points, the bulls may have given up.

Whether this big reversals turns into anything more remains to be seen, but we were due for a rebound. Let's not forget that we are in a bear market and that this may not last, but bear market rallies can be very strong.

The S&P 500 has now formed two head and shoulders pattern, which I don't recall ever seeing before - or at least I never noticed one before. There a blue H&S and a red one. Should this rebound follow-through to the upside, there will be resistance in the 1175 area, and that resistance is falling.


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

If this rally leads to something bigger, our first clue would be a break above that descending resistance line. It's much too early to call.

The dollar continues to rally, which was part of the reason for the weakness in stocks this fall, but certainly not the only reason. The new trend is up, but the dollar is hitting the rising resistance line. If the dollar takes a little breather and pulls back to the lower end of the rising trading channel, it could help a short term rally in stocks.


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

Yesterday I posted the heavily bullish historical stats when the market falls 2.5% or more for two consecutive days while making a new one-year low.

According to sentimentrader.com, since 1928,the S&P 500 lost more than -2.5% on two consecutive days while closing at a new one-year low, 24 times. The next day was positive 50% of the time, the next week 71% and the next month 58%. As far as the next week goes, since 1940, the S&P was perfect being up 11 out of 11 times with a median return of +4.7%. Since 1928, if the 2nd down day was a Monday (as it was this time), then the next week was positive all 5 times, averaging +11.1%.

By early Tuesday morning we were seeing a 3rd 2.5% loss, but by the close the S&P 500 gained 2% so it looks to be a good signal again. Now if we can get that +11.1% that it has been averaging since 1928 on the Monday scenario, we'll be doing just fine. I would probably be a seller before we ran that far.

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

Tom Crowley

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