TSP Talk – 07/28/12

Stocks rallied sharply late last week and turned what looked like was going to be a poor week, into a week of solid gains. The game in Europe continues as this week it was optimism over bailouts that sent the markets higher.

We saw weak economic data with the 1.5% GDP, but that was actually slight better than estimates so the market reacted positively. We also had a better than expected initial jobless claims report on Thursday.

Once open gaps get filled, we often times see a reversal as the filled gaps satisfied many antsy traders and investors. This may be more info than you wanted, but the reason that is true is because once an overhead gap is filled the traders who were caught by the downside move have now broken even, and that is sometimes a psychological reason to sell.

For example: If you bought a stock at $40 a share and the next day it gaps down to open at $35 a share, you are stuck with this loss and you wish you didn’t make the trade.

After several days the stock starts to make its way back and you think, “If it can just get back to $40 I can get out of what looked like a losing trade and break even.” And with that mentality times millions of shares traded, we start to see selling when the gaps get filled.

I showed this chart last week where the S&P 500 was making higher highs, but the number of stocks moving higher was declining. It happened again and this new move to a higher high of Friday is showing a lower low in the advance decline line.

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

This mean fewer stocks are participating in the rally, which is a negative divergence and could be a warning sign.

This coming Friday we will get the July jobs report and that could set up an interesting week of trading as traders position themselves before the report speculating on the outcome.

If you are wondering how August does historically, it’s not one of the better months.

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