Don't look for a 'V' but maybe a 'W'

5/21/12

Stocks tried to rally on Friday but once again, investors did not seem too excited about holding over the weekend with things rapidly deteriorating in Europe. By the close, the Dow lost 73-points, making it 6 consecutive losing days.

[TABLE="align: center"]
[TR]
[TD]

[/TD]
[TD="align: center"] Daily TSP Funds Return


[TABLE="align: center"]
[TR]
[TD="align: right"] C-fund:
[/TD]
[TD] - 0.74%
[/TD]
[/TR]
[TR]
[TD="align: right"] S-fund:
[/TD]
[TD] - 1.14%
[/TD]
[/TR]
[TR]
[TD="align: right"] I-fund:
[/TD]
[TD] - 0.54%
[/TD]
[/TR]
[TR]
[TD="align: right"] F-fund:
[/TD]
[TD] - 0.06%
[/TD]
[/TR]
[TR]
[TD="align: right"] G-Fund:
[/TD]
[TD] +0.004%
[/TD]
[/TR]
[/TABLE]
[/TD]
[/TR]
[/TABLE]

For the weekly and monthly TSP returns, please see our recent TSP Weekly Wrap-Up.

The S&P 500 has also been down six days in a row, 8 of the last 9 days, and 11 of the last 13. This has been a slow melt-down since the head and shoulders break.

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

The 200-day EMA has been taken out and whenever the 200-day is in play, I like to take a look at the 200-day simple moving average (SMA) as well since many traders also follow this indicator. It is still 17-points below where the S&P 500 closed on Friday so it could easily be tested early this week. This could be a psychological area for some buying.

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

The kind of decline we are seeing should give us a snap back rally at some point soon, but I wouldn't expect a "V" bottom. We had a similar steep correction last summer, and it eventually created sharp 100-point rallies (nearly 10%) in the S&P 500, but the action was very choppy for months afterward. So we may be more likely to see a "W" than a "V" bottom, and maybe something more like "VVVV".

Similarly, the last couple of times that we saw the NYSE overbought / oversold indicator get this oversold - and this is just the 3rd time since the bear market bottomed in early 2009, the market took a while to digest the losses. The early 2012 trending market will likely become a trader's market for the next few months.

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

The indicators are quite stretched to the bullish side. Only 1% of the indicators on sentimenTrader.com are at extremely bearish readings, while a solid 29% are at extremely bullish positions.

Chart provided courtesy of www.sentimentrader.com

This should ignite that elusive snap-back rally pretty quickly, but as we discussed above, this will be a trader's market and rallies may have to be sold. When the market sells off like this, we have to be on the lookout for an actual crash. They are rare, but when they come, they tend to manifest out of market environments such as this one. We can't get too comfortable until the technical picture improves.

Thanks for reading! We'll see you tomorrow.

Tom Crowley


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[crommie]

Tom,
Thank you once again for your insight and education as to what to expect and what to look out for (the unexpected). I have learned through my mistakes of late that one must take what the market is willing to give at that moment and to be nibble when that moment's direction changes. I have also learned that one must be patient in order to not act too quickly when one thinks things are about to change. Those of us that took what was offered and had patience from Nov/Dec until April made out very well. Those of us that were nibble around May 1st also made out very well and now need to be patient to wait for that next buy in.
So all of this leaves me trying to figure out when one should be nibble and when one should be patient?
Thoughts?

 

[tsptalk]

I wish I knew for sure. I look at the indicators, the charts, sentiment, etc. and try to figure that out, but it is never easy. I also take the queue's from our premiums services, to be honest, but with access to all of them, I still have to make my own decision with only 2 IFT's.

Good luck! If you find the answer, please let me know. .