TSP Talk Blog

9/07/12

Stocks rallied sharply as ECB President Mario Draghi backed up his pledge to do whatever it takes to preserve the euro, saying the ECB's plan for potentially unlimited bond-buying would address "unfounded" fears of investors about the survival of the euro. The Dow gained 245-points.

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I love the action in the charts, but I'm not overly excited about the European plans, plus we now have to deal with today's (Friday) jobs report.

The S&P 500 shot up through the August highs, made new multi-year highs, and is now back up testing the top of the rising trading channel. Volume was up and emotions were high.


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

Let's take a look at some of the charts we have been watching and see what yesterday's action did to them.

The Russell 2000 had formed a bullish cup and handle and an inverted head and shoulders pattern, and the breakout yesterday came right on queue.


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

We asked whether the breakdown in the triangle formation on the Dow Transportation Index was just a fake-out or a real breakdown. Yesterday's action may have helped to prove the "fake-out" argument, but with the jobs report on deck, and the 20, 50, and 200-day EMA still overhead, we could get a better idea after Friday's close.


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

Here's a follow-up to the semi-conductor index which had a beautiful bull flag that pulled back to an area of strong support. That's is the kind of breakout you'd expect. It's hard to complain about that action, although it is lagging a bit by not making a new high like the other indices.


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

The Nasdaq not only made a new yearly high, but it closed at its highest point since the year 2000.


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

Here's the chart of the 10-day moving average of the put / call ratios. The dumb money (CBOE and equity ratios) were very bullish until they recently pulled back so it's not too much of a surprise to see the market rally as they got more bearish. But the smart money of the OEX put / call ratio are getting very bearish.


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

This sounds about right. The smart money tends to get more bearish as the market climbs while the dumb money does the opposite - gets more bullish when stocks go up.

New highs always make me nervous in the short-term, but it is usually a good long-term signal. I have no idea why the market would be getting so bullish since the economic numbers have not been great, but a new high is a new high and that is something technicians look for.

That OEX reading of nearly 2 to 1 bears to bulls is a concern and taking some profits over the next few days may not be a bad idea, as long as you still have an IFT (interfund transfer) left to buy back into the stock funds if we do get a pullback from these new highs. Smart traders are more apt to sell breakouts. We are not exactly traders and with only a couple of IFT's a month we don't have the luxury of jumping in and out at will, but we can still take profits during rallies and buy pullbacks.

We have had two weeks of politicians talking about how wonderful they are going to make things so perhaps it is just an emotional rally. How long the excitement lasts, I don't know. We'll hope the charts give us the answers.


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Thanks for reading! Have a great weekend!

Tom Crowley


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