Bull Market May Need Rest

Good morning! It’s your govloop weekly dose of TSP Talk. This market commentary is updated daily on www.tsptalk.com.

Stocks fell modestly on Friday as the Dow dropped 22-points, but the TSP stock funds were mixed as small caps and the I-fund managed small gains.

After five consecutive positive days, the S&P 500 took a little breather on Friday dropping 0.1%. We can clearly see that there is resistance overhead and the question is, can the index continue to climb along with the rising trend line acting as resistance, or are we due for at least another test of the lower end of the rising wedge formation?

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

The PMO is getting close to another buy signal and MACD actually made a minor higher high, which can be considered a positive sign.

If a pull back does come we would look for the open gap at 1016, the moving averages, and the lower trend lines to act as support, in that order.

As I write this on Sunday evening, some of the Asian markets are being hit hard to the tune of 1.0% to 2.5%. The I-fund has been performing quite well with some assistance from a weakening dollar and its chart is also showing signs of needing a break as it hits overhead resistance.

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

There is still a prominent open gap on the EAFE (EFA) chart, and I would think this rally has the potential to eventually fill that gap. However, the index has hit the bottom portion of the gap and that can act as temporary resistance before the gap gets filled. We saw that happen with the lower gap, which was filled, but not before about a week of the resistance at the bottom part of the gap holding first.

Last week the market leader and very economically sensitive Dow Transportation Index really soared; break to the up side of the rising wedge formation. Breakouts are generally very good signs for a chart, but they can also be an indication of some short-term exhaustion.

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

Volume was very high during the breakout, and the PMO moved back into a buy signal. This is all good for both the signs of an economic recovery, and for the stock market, but as I said, having gone from 3600 to 4000 in about a week, could mean the index needs a little rest.

This is an options expiration week, which are typically a little stronger than a random week on Wall Street, but seasonality has not exactly been a good indicator lately. We know both August and September are not the greatest months for stocks historically, yet stocks have done quite well since July 31.

For the longer term, we are seeing very good things happening that are encouraging for the stock market, but if the technical picture deteriorates and we start seeing supports break and sell signals in some of the indicators, you might want to be ready with a plan of attach to protect any recent gains.

Thanks for reading! We will see you tomorrow on TSP Talk.com.

Tom Crowley
TSP Talk.