Can the Bull Break Free?

Good morning. It’s your weekly dose of TSP Talk.

Although the Dow managed a small gain, stocks and bonds were mostly down on Friday after the surprising stronger than expected payroll report.

If you missed it, there were 345,000 jobs lost in May, much fewer than the 520,000 that were expected. The 9.4% unemployment rate was slightly higher than expected. I have read several reasons why this data is flawed and will likely be revised in the next jobs report, but the fact that this pretty positive news did not send stocks higher, may be the tell. I am more inclined to believe that it was more of a buy the rumor, sell the news reaction.

The S&P 500 has made a great move in the last three months and the rally is really pushing the envelope on the overhead resistance. Can the market continue higher or will this prove to be a bear market rally that ends at the 200-day moving average, and the declining bear market trend line?

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

I have mentioned several times that the MACD indicator has been declining since mid-March, while the S&P continued to rally. This is an obvious divergence that can be an indication of weakness to come.

Here’s a look at the MACD indicator during a few of the bear market rallies in 2001-2002.

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

You can see that the divergences in the MACD (S&P moving up while MACD slopes downward) led to further pullbacks and declines in the index.

There have been situations in the past where the market continued to rally, while the MACD declined. The MACD eventually became more in sync, correcting itself if you will, and the rally continued. This is less common, but it does happen. We’ll just have to see how this plays out.

A quick look at the weekly S&P 500 chart shows the resistance quite clearly. Based on this, I would think that if this rally is going to run out of steam, it will be in June. That makes this week and next quite important for this current rally. I will say, however, that the PMO indicator in a very strong position.

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

The last thing I would want to do is be a buyer in this current situation. It may or may not be too early to sell for those in the market now, but it is certainly too late to buy for those who are not.

Best case scenario for me to be swayed into being a buyer, would be break above the 200-day moving average on the daily chart (top chart), see the 50-day moving average cross above the 200-day moving average, and then see a pullback back down the 200-day moving average that holds. That would be a great technical setup. Right now, I don’t see that happening, but if it does I want to be prepared.

What I do suspect will happen is that the 200-day moving average is going to continue to be resistance and we get a pullback this summer. But the market is going to do, what the market is going to do, so be prepared with a plan so you are ready to act.

Thanks for reading! The TSP Talk Market Commentary is updated daily on www.tsptalk.com.