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1525 again, but the target is moving

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by , 03-04-2013 at 07:44 PM (871 Views)
03/05/13

After a weak open on Monday, the bulls stepped up again taking the indices into positive territory, and held those gains into the close. The Dow ended the day up 38-points. The Transports led on the upside while small caps lagged.
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The S&P 500 is once again testing the 1525 area. A month ago I looked at this level as a possible upside target and resistance point because of the short-term trading channel and...


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

... the longer-term trading channel. But as you can see below, since the trading channel is still rising, the resistance line is closer to 1530 now but still, it's the same theory that this area is where the upside could get a little tougher.


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

The market leader, Dow Transportation Index, gained 1% yesterday taking it to a new all-time high, closing above 6000 for only the 2nd time ever.


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

As I have been talking about, I am a little torn over the fact that the charts are showing signs of trouble with overhead resistance and some bear flags, while my favorite indicators, sentiment related, are telling us that investors are so bearish it should be bullish for stocks.

Whether in the form of surveys, put/call ratios, or Rydex Ratios which show where investors are putting their money, the signs are clear that this rally is not being embraced, especially by the dumb money, and that tends to be a signal to be a buyer rather than a seller.

This "Put Purchases" data by the smallest of options traders, usually consistent dumb money, started pouring money into puts - options that bet against the market - after the recent pullback, and it is now at a level that tends to coincide with market bottoms.


Chart provided courtesy of www.sentimentrader.com

According to sentimenTrader.com: "Despite the S&P 500 being within a couple of points of a multi-year high, that put volume was in the top 5% of all readings since 2000. This is normally the kind of reading we see after stocks have fallen several percent at least and investors start scrambling for protection.

"The only time in 13 years that put volume was so high when the S&P was so near a high was in early August 2006. Stocks had dipped a bit in the weeks prior, but then rallied back. Investors apparently didn't believe the rally, since they started buying a bunch of put options, but then stocks just continue to climb afterward.

"With no real precedents for this kind of activity, we can't put any hard numbers to this data. Given the indicator's history as a contrary measure, though, we'd rate this is a positive for stocks."


The 10-year Treasury yields have been falling and it looks like a small bear flag has formed. That would be bearish for yields (bullish for the F-fund) but the yield is now trying to find support at the 200-day EMA - an area that can be strong source of support or resistance.


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

Whether or not the bear flag breaks down and the yield drops below the 200-day EMA, may determine what happens to the stock market. I would be surprised if yields could fall below that strong support without stocks also falling. Could this be setting up the "Black Swan" event we talked about a couple of weeks ago?

With stocks remaining buoyant, it wouldn't seem likely that the 10-year yields would fall below 1.8% again, so I'd expect some kind of news related event to spook both. Otherwise, yields will bounce off of the support and stocks will continue to defy gravity.

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

Tom Crowley


Posted daily at TSP Talk Market Commentary

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