TSP Talk Blog

7/25/12

Despite another late rally, the Dow suffered yet another triple digit loss. The 104-point decline was the third consecutive 100+ point loss for the Dow, and that is the first time that has happened since last September.

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The Dow was down 200-points earlier in the day but once again we saw buyers step up to take it well off its lows by the close. I suspect that yesterday's late rally may have been short covering that had something to do with Apple reporting earnings after the close. There reports are important enough to move the market and Apple is prone to posting some big numbers so the shorts were probably looking to get out of the way. The problem is Apple's report came in surprisingly weaker than expected and the stock was down about 5% in after hours trading. This should give the Nasdaq some problems today.

According to sentimenTrader.com: "Sell-offs in the early part of a week tend to lead to short-term rebounds. Of the 19 times the S&P 500 has declined at least -0.9% into a Tuesday, the rest of the week showed a positive return 15 times, averaging +1.5%. Three of the four losing trades reversed to gains within 3 additional days."

The S&P 500 dipped below the recent rising trading channel intraday, but the late rally allowed it to close above the support line. It did close below the 50-day EMA - a warning sign - and we have been getting a lot of warning signs in some of the other indices.


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

The Nasdaq retested the neckline of its head and shoulders pattern yesterday. The big open gap up near 2930 looks ripe for a fill, and the 200-day EMA could give some temporary support, but the 20 and 50-day EMA's might act as resistance on any rally attempts, and that bearish head and shoulders does not bode well for the next couple of weeks.


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

The Dow Transportation index also has a head and shoulders pattern, but this one is very large and should it break, the downside target would indicate a significant decline.


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

The indicators are getting pretty oversold so a little relief rally is certainly possible, but the sentiment indicators are giving us mixed results.

The put / call ratios are giving us an interesting reading because both the dumb money and the smart money seem to be getting more bullish. I look at this as a bearish sign because the dumb money is usually consistently wrong.

You can see that the smart money (green) is testing the 1.25 level and the market has had a history of rallying when it gets to this level - at least since early 2011.


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

But the dumb money is also getting more bullish and we know when they get too bullish, it's almost always a bad sign.

The price of oil pulled back for a couple of days but it actually reversed early losses yesterday and closed up 0.5%.


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

The first bull flag produced a pretty good rally and it appears we may a second bull flag forming, but that 20-day EMA would probably have to hold - otherwise it could be a short-term top forming.

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

Tom Crowley


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