11/15/11
Stocks pulled back yesterday, which is not a complete surprise considering the nearly 400-point rally on Thursday and Friday of last week. The Dow lost 75-points on the day.
For the TSP, the C-fund gained 0.99% yesterday and Friday combined, the S-fund was up 1.20%, the I-fund made 1.71%, and the F-fund (bonds) added 0.11%.
The pullback in the S&P 500 kept the index within its triangle / pennant formation. This is healthy action but a breakdown or breakout is coming soon... but which way?
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
As I mentioned in the Weekly Wrap Up, we can expect a fake-out before a real breakout. Since pennants area continuation patterns, and the market has been in an uptrend, I am suspecting that this pennant will breakout to the upside, but that may mean a fake-out to the downside first.
Volume was very light yesterday (and Friday), and volume that low, lowest since July, on a day when the indices were down about 1%, has a tendency for short term (2 to 5 days) weakness followed by a rally. That would go along with our triangle fake-out / breakout theory.
According to sentimenTrader.com:
"Last week, large options traders spent 33% of their total volume buying protective put options. These are traders who move 50 or more contracts at a time.
"That 33% is a very large number. Since 2000, only 10 other weeks have matched it. Typically, such heavy put buying has resulted in gains for the market going forward, with one very notable exception."
Chart provided courtesy of www.sentimentrader.com
So unless we have another September 2008 on our hands, history suggests we have a positive bias in the coming weeks.
Those "large options traders" are a different category than the smart and dumb money options put-call ratios that we normally post.
We have a pretty heavy schedule on the economic data calendar this week so I suspect the market will react to any surprises, but I also expect the triangle formation will help mold the reaction. That is, we could get a quick breakdown, then an eventual breakout above the triangle.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
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