TSP Talk Blog

2/25/13

Stocks bounced back on Friday after Wednesday and Thursday's two-day sell-off. The Dow gained 120-points - the day after our sentiment survey showed only 29% of our readers were bullish.

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The S&P 500 fell below the narrow rising trading channel last week, and since it has lasted so long, the bottom of that range, the support line, could now easily act as resistance. The line is still rising so the resistance is rising, but it could be a barrier for any attempted larger gains or breakouts.


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

The index is trading at the top of its longer-term trading range, and after falling below the 20-day EMA on Thursday, the S&P quickly moved back above it, but this could just be a short-lived decoy rally, particularly since the volume was relatively low on Friday.


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

At the risk of being repetitive since I mentioned it on Friday and in the Weekly Wrap Up, my focus at the moment is what happened in 1987 and 2012 and watching for repeated action.

In 1987, after remaining above the 20-day EMA from the first trading day of the year, all the way into March, the S&P fell below the EMA, quickly rebounded, but a temporary top was made shortly afterward...


Chart provided courtesy of www.decisionpoint.com

Same thing in 2012: The S&P stayed above the 20-day EMA every day until early March. A quick break below it, followed by a snap back rally led to a top a few weeks later.


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

So we could see some follow-through upside action this week, but I have a feeling we are seeing the start of at least a short-term top that could lead to a correction.

While some of the short-term indicators became oversold after the two-day decline last week, the slower intermediate-term indicators are rolling over from overbought levels, and that could be a signal for us to get less aggressive.


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

As I mentioned, last week's TSP Talk Sentiment Survey came it at 29% bullish, 63% bearish for a 0.43 to 1 bulls to bears ratio. Last time we saw a ratio that the low, the S&P rallied 1.73% the following week, and the last time the bullish percentage was as low as 29%, the S&P gained 2.77% the following week.

So yes, a top may be forming, but bull markets don't die easily and they don't stop on a dime. Look for volatility to pick up to confuse both the bulls and the bears, but you might start thinking about locking in some gains if you're in a very aggressive allocation (heavily in the stock funds) right now.

Thanks for reading! We'll see you tomorrow.

Tom Crowley


Posted daily at TSP Talk Market Commentary

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