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Breakout or fake-out?

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12/12/12

Stocks rallied strongly out of the gate yesterday taking out some key resistance levels, but some afternoon weakness left the indices off their highs as the early triple digit gain in the Dow turned into a 78-point gain by the close.

Daily TSP Funds Return
G-Fund: 0.0036%
F-fund: -0.22%
C-fund: 0.66%
S-fund: 0.70%
I-fund: 0.58%
The bulls were in charge until John Boehner and Harry Reid opened their mouths. The problem is, they were telling the truth, which is a deal on the fiscal cliff is not in sight. Still the indices managed some respectable gains and we saw some nice activity in the charts.

Depending on how you draw your neckline on the inverted head and shoulders pattern, the S&P 500 may have broken out. However, other resistance is still present, and it is amazing that the leaders of congress came out exactly at the same time the S&P was hitting the highs from late October and early November, backing the index off some.


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


The Russell 2000 nearly filled an open gap near 836 yesterday, and it too looks to have broken above the inverted H&S, depending where you draw the neckline.


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


The Transportation Index made a new multi-month high in early trading yesterday, but it put in a big negative reversal day and closed below the breakout point. This has negative follow-through written all over it, but there is some rising support just below that may help.


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


The Semiconductor Index, one of the catalysts for the Nasdaq and technology stocks, broke out with a big 2% day, closing at its highest point since September 21st. That is good news, but it has run a along way in a short amount of time and may need a little rest.


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


Here is the kind of data I like to see: This chart shows that mutual fund investors, normally on the "dumb money" side, are still hitting extreme bearish readings. They have not embraced the recent rally yet.


Chart provided courtesy of www.sentimentrader.com

Why is that good? If the dumb money is not buying yet... they will. This will be just more fuel for any rally. You can see prior readings below the $900 million mark for bullish mutual funds can produce pretty significant rallies over the next several months.

That is a long-term indicator so we may not get immediate satisfaction. A little more weakness in stocks could pull that number down to $800 million where we're more likely to see a market bottom since that happened during the prior three market lows.


The Fed ends its FOMC meeting today so there could be some fireworks if they throw us a surprise.

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

Tom Crowley


Posted daily at TSP Talk Market Commentary

The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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