12/21/11
Folks on Wall Street were scratching their heads as we had a big rally come out of, what seemed like, nowhere. Bond yields in Spain dropped sharply and we had a decent housing report, but yesterday's rally just told me that too many folks were on the sidelines waiting. The Dow gained 337-points.
For the TSP, the C-fund gained 3.00% yesterday, the S-fund jumped 3.65%, the I-fund was up 2.69%, and the F-fund (bonds) lost 0.34%.
It was a typical short covering type rally with many bears forced to buy to cover short positions, which kept adding fuel to the rally. These types of rallies can last a few days, but they can also end abruptly. With seasonality on the side of the bulls, barring any major news events, I suspect the bears won't get too aggressive again until after the holidays.
Suddenly, the S&P 500 is back above the 20, 50, and 200-day EMA's. It also appears to have broken above the bull flag we've been watching, and rising support line has held on its first test.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Dow Transportation Index, which looked terrible on Monday, resumed what looks like a very clean inverted head and shoulders pattern, which is bullish. The rising support line seems to have held but in order to claim victory for a new rising trend, we'll want to see it move above the highs made earlier this month, which is the neckline of the inverted H&S.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
We have been in a long trend of the dollar moving inversely to the stock market, and if that holds, I can see some trouble for the stock market in 2012.
The dollar put in a large head and shoulder pattern in 2010 (red) which eventually broke down, as H&S's do, and came pretty close to hitting the technical downside target.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
Now we have what looks like a large inverted head and shoulders pattern (blue) and if it breaks out, the upside target would be near the 2010 highs.
The euro is confirming this as it is in a large head and shoulders pattern and a breakdown to the technical target would be near the 2010 lows.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
This would likely have a negative impact on the U.S. stock market. What makes this interesting is that we have all been watching the national debt skyrocketing and with the actions of the Fed, assumed it would put a lot of pressure on the dollar. This seems to be telling us otherwise. At some point the dollar could rise while stocks rise simultaneously, and that will probably be an all-clear sign for our economy, but until then I look at the potential dollar strength as a negative for stocks.
Here is the seasonality chart specifically for the days surrounding the Christmas NYSE holiday. This year the market will be closed on Monday December 26.
Chart provided courtesy of www.sentimentrader.com
You can see that next week poses the best prospects for positive returns but this week isn't bad considering Friday's (day -1) historical strength.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
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