TSP Talk Blog

11/26/12

Stocks rallied nicely on Friday, capping off a big Thanksgiving week where the major indices saw gains close to 4%. The Dow gained 173-points on Friday, but volume was very light, and the bulls will have to prove it was more than holiday action.

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We have talked before about pre-holiday action reversing the larger trend, and we certainly saw that last week as the market put in a big reversal from the recent downtrend. Post-holiday action has a tendency to reverse the pre-holiday action and resume that bigger trend. That is the challenge for the market this week.

The S&P 500 gained 1.3% on Friday and 3.6% for the week. What looked like a disaster unfolding the prior week with the rising trendline support and the 200-day EMA breaking, turned into a big positive reversal and the chart looks much better now.


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

The problem is, the S&P is now testing the resistance of the upper end of the descending trend line, and the 50-day EMA. If the bull market is running out of steam, now would be the time for it to show it. There's resistance overhead and now the indices are on the overbought side.

The light volume rally has taken the NYSE overbought / oversold indicator from very oversold into solidly overbought territory. Below I marked prior instances of extreme or near extreme oversold readings moving to overbought. Most of them showed the rally run out of steam rather quickly, at least in the short-term, and in some cases we saw big declines.


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

A 4% rally in the span of a few days tends to send most indicators into overbought territory, and if we don't get a pullback, then any short-term gains could be on the light side.


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

The Russell 2000 (small caps) made a nice move higher last week, and even moved back above the 200-day EMA. But much of those gains came on very light volume and this week we'll see if the big money managers are embracing the rally, or looking to sell it. Like the S&P 500, this chart improved, but still has some issues.


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

A reminder (last time) that the pre-Thanksgiving week is historically strong, but there can be some profit-taking after the weekend.


Chart provided courtesy of www.sentimentrader.com

The dollar dropped sharply on Friday helping stock prices. The large open gap on the UUP chart was filled on Friday, and last week's weakness created two new open gaps above 22.00 and up to 22.20. Like stocks, the dollar can experience pre-holiday reversals from the major trend, and a resumption after the holiday. We'll see.


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

Signs of strong Black Friday sales was a major catalyst for Friday's action but this week we should start getting some more accurate numbers from the retailers. And today is "Cyber Monday" so I'm sure we'll be getting sales data from that as well, and of course the market will react accordingly.

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

Tom Crowley


Posted daily at TSP Talk Market Commentary

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