TSP Talk Blog

6/28/12

Stocks rallied yesterday, following through on Tuesday's attempt at a rebound off of the 200-day EMAs. The Dow gained 92-point but we have a resistance test coming up.

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The S&P 500 is giving some mixed signals as it seems to have found support at the 200-day EMA, but it is now testing the 50-day EMA as well as the neckline from the old inverted head and shoulders (red). If you squint real hard you can see that a case can be made that the S&P is now forming an upright head and shoulders pattern (blue).


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

Inverted head and shoulders pattern are generally bullish while upright head and shoulders patterns are generally bearish, but both are actually continuation patterns that tend to break in the direction of the major trend. The question is, what is the direction of the major trend right now? We have had a series of higher highs and higher lows that could be interpreted as a new upward trend, but if the June high isn't taken out, this could have just been a rally in a new downtrend.

I have seen some indicators that look very positive, but with this being an election year, the headlines may be the main catalyst. Here's one from last night....

According to Bloomberg.com, "Federal Reserve policy makers will probably announce in September a third round of bond purchases under quantitative easing to spur U.S. economic growth, according to Bank of America Corp." [More]

It is never a good idea to fight the Fed, but will they actually do this in an election year? I think the answer may be - absolutely.

The Dow Transportation Index fell sharply during the recent market pullback and is now trading back below all of the major moving averages.


Chart provided courtesy of www.sentimentrader.com

This may be the index to watch during the early July seasonal strength. If the Transports can get back into a better technical position, the rest of the market will likely follow, but the resistance is obvious.

Speaking of July seasonality, yesterday we showed the chart of the historical returns surrounding the 4th of July and it was quite positive. Not surprisingly, early July also shows the positive bias, but as you can see things cool off after the first week or so, although the end of the month picks up nicely again.


Chart provided courtesy of www.sentimentrader.com

If this summer is like most summers, we should see a strong rally at some point, but also some weakness. July is a good month historically but August and September - not so much. Buying and holding may or may not work over the summer depending where things land, but you can usually count on a rollercoaster ride during the summer months so timing the market seems to be the best approach.

We should find out the fate of the healthcare law today. It would seem the market may have already priced in the mandate being struck down, so anything else would be a surprise and could be a market mover.

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

Tom Crowley


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