TSP Talk Blog

2/29/12

The bull train continued to roll up the tracks as the Dow gained another 24-points yesterday. Although the gains were modest, and small caps and Transportation stocks were down, the S&P 500 and Nasdaq followed the Dow up and kept their trends going.


For the TSP, the C-fund was up 0.35% yesterday, the S-fund lost 0.19%, the I-fund gained 0.39%, and the F-fund (bonds) added 0.01%.

Despite the need for a pullback, the S&P 500 has been up 7 of the last 8 days. Every time we see a test of the lower end of the rising trading channel, the market has rebounded. At some point we'll see a pullback / correction, but I will be looking for the 50-day EMA to hold when it happens - as we have seen in other strong bull markets. More on that below.


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

I have been showing the Dow Transportation Index, the market leader, often as a possible reason why we could see the S&P 500 pullback, but I now see something very positive in the Transports.

The recent pullback fell below the 20 and 50-day EMA's, but has found its way back above the 50-day EMA. What I like is that the neckline of the inverted head and shoulders pattern has been holding.


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

We've shown this chart many times and this is another example of not only how good of an indicator these head and shoulders pattern are, but the number of bullsih inverted H&S patterns we are seeing are a testament to how strong this bull market is.


I wanted to show some previous strong trending bull market runs we've seen in the last decade for some clues.

In 2010 - 2011 we had a very strong upward trend from September 2010 to February 2011.


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

Two things come to mind. When the trading channel breaks we should take notice, but that 50-day EMA is the real test of a strong bull market. Eventually the 200-day EMA gets tested, but by then a lot of damage has usually already been done.

In 2006 - 2007 we saw 2 separate strong trends broken up by a sharp sell-off. That sell-off was one of those geo-political events - China. But again, the 50-day EMA and the 200-day EMA were the targets and the places to start buying.


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

2003 saw two sharp rising trends, with the first one being broken by a pullback to the 50-day EMA. Then the 50-day EMA was tested several more times in the last half of the year.


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

That chart shows you why I look for 3 (to 5) closes below before confirming a breakdown (or above in the case of a breakout.) Selling on the 1st sign of a break could be frustrating as you would have been whipsawed out a few times.

Bottom line, fighting this trend has not been wise and our sentiment surveys have shown that many of us have been, and still are, fighting it. At some point we will get a pullback, and until proven wrong, the 50-day EMA will be our best buying opportunities.

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

Tom Crowley


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