Post Options Week Test

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

The Dow closed 32-points higher on Friday, the 5th consecutive daily close in positive territory for the major index, but the rest of the market was flat at best as all three TSP stock funds ended the day in the red. Bonds also ended the day lower.

The S&P 500 has rallied up toward the top of the head, of the recent head and shoulders pattern (H&S), and is now back above the 200-day exponential moving average (EMA). Was last week’s move higher an options week smoke screen for the bulls, or was the bearish H&S pattern the smoke screen for the bears?

This area (940) comes with a lot of overhead resistance and, along with the weak seasonality of mid-July and a post-options expiration week, should prove a big test for the S&P in the short-term. If the bulls can keep this market from pulling back here, we may have to tip our cap to them and think about getting on board.

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

Let’s see how the two market leading indices are doing:

The Nasdaq was struggling a week ago but last week made another new high for 2009. Like the S&P 500, the index is overbought and may struggle this week to hold above the June high. Again, this is going to be a good test for the bulls.

Chart available on the TSP Talk commentary page.

The lagging Dow Transportation Index has remain in a pretty tight trading range, but is in a very large inverse head and shoulders pattern (which is bullish), although it has not been able to break out. There is strong overhead resistance in the way of the 200-day EMA, and the declining trend line going back to January.

Chart available on the TSP Talk commentary page.

It would not surprise me to see this index move down to test the lower end of the trading range again (near 3000) but eventually we will see a breakout from the range one way or the other. This breakout may tell us the direction of the next intermediate-term move for not only the Transports, but for the rest of the market as well. If the Transports break over 3500, it will be difficult to deny the strength of the market. Remember, the Transports are a very good indicator of the strength of the economy.

Taking a look at the housing index, which has been in a bear market since its peak in 2005 if you can believe that, is flirting with the upper end of its declining trading channel again. A break to the upside would be another great sign for housing, the economy, and eventually the entire market, but as we saw a couple of times during this 4-year bear market, there have been breakouts that turned out to be short-term teases.

Chart available on the TSP Talk commentary page.

I am not an economist by any stretch of the imagination, but with unemployment and foreclosure numbers continuing to rise, I can’t see how the housing industry can do any better than stagnate in the short to intermediate-term. The market has surprised me before and I am certain it will surprise me again, so I am not looking at what I think will happen, but rather I will watch these charts for clues as to what is actually happening.

Last week’s TSP Talk Sentiment Survey came in at 46% bulls, 44% bears for 1.05 to 1 bulls to bears ratio. Our system still has us officially in a bear market and that means anything over 1.0 to 1 keeps the system on a sell signal.

That’s all for today. Thanks for reading. This market commentary is updated daily on www.tsptalk.com.

Tom Crowley
TSP Talk