TSP Talk Weekly Wrap Up – 4/21/12

As earnings and economic reports rolled in, the stock market bounced around trying to find direction. The normally historically positive option expiration week during the April earnings season did finish with gains, but it was not an easy task as the sellers were not too far behind any rally.

The S&P 500, what we use to listen to the heartbeat of the U.S. stock market, has been slowly rising off of the support lines and the early April lows, but that action has created a bearish formation called a bear flag.

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

Here is a closer look at the bear flag and we have been talking about this all week on TSP Talk so I won’t to go into too much detail, but suffice it to say that bear flags are bearish (negative.) The fact that the S&P 500 is holding above the 50-day EMA is what the bulls are hanging their hat on right now. If the bear flag breaks down and the S&P 500 moves below the 50-day EMA, the short-term outlook becomes less optimistic – although the longer-term outlook may not be, but we’ll talk about that another time.

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

Many of the charts we follow are showing this bear flag, but I wanted to point out the importance of the 50-day EMA right now on one of the market leaders – the Nasdaq Composite. If this leading index can stay above the 50-day EMA the rest of the stock indexes should remain positive. Right now the Nasdaq is being bullied by Apple’s stock, a major influence on the Nasdaq.

After a nearly parabolic move higher over the last several months, Apple has been pulling back going from nearly $650 a share to $572. That’s a 12% loss, which is not excessive for an individual stock, but because the Nasdaq is so heavily weighted and dependant on Apple’s stock, it has been a big drag on this leading index.

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

If Apple can hold here at the 50-day EMA and after filling that open gap near 570, we could see the Nasdaq rebound, which would likely help the rest of the market. If these support levels fail, the rest of the market could follow. Keep an eye on the price action in Apple this week.

Our readers became a lot more bearish last week as the TSP Talk Sentiment Survey came in at 40% bulls, 45% bears, for a bulls to bears ratio of 0.89 to 1. That is a complete reversal from the prior week’s bullish results, and this new extreme bearishness would normally be a good sign for stocks going forward. The theory being that if everyone is bearish, there’s no one left to sell.

According to sentimenTrader.com, over the past 20 years, the S&P 500 futures have been positive the day after April option expiration (the third Friday of the month) only 30% of the time. However, from the next Monday’s close through Friday (meaning from the close of 4/23 through 4/27 in our current case), it was positive 80% of the time averaging +0.8%. The last 8 years have all been positive during those 4-day stretches.

Good luck, and thanks for reading. We will be back here next week with another TSP Wrap Up.

Tom Crowley
www.tsptalk.com
Weekly Wrap-Ups Archive
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