The Right Side of the Charts

Good morning. It’s your weekly dose of TSP Talk.

Stocks continued their winning ways as the jobs report and post-stress test reports gave investors another boost of confidence that the worst may be behind us.

Despite an unemployment rate of 8.9%, the slightly lower than expected number of jobs lost in April triggered more buying. The S&P 500 picked up another 2.4%, but as we touched on last week, the market leaders (Nasdaq and Dow Transports) lagged again picking up about 1% less. Nothing too alarming but certainly worth noting.

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

The S&P 500 is also 20-points away from the 200-day EMA (exponential moving average). This is significant in that bear market rallies tend to find a lot of resistance at this indicator, so I believe we are within a couple of weeks of finding out if this rally is something more than just a bear market rally. The 200-day EMA is currently 950 and the upper descending trendline of this bear market is near 975.

I have posted the 2000-2002 bear market chart below often during this current bear market, mostly noting the power of bear market rallies, but also to show that these rallies can fade as quickly as they started.

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

You can see how formidable the resistance of the 200-day moving average and the upper end of the descending trading channel of a bear market can be.

The NYSE is obviously overbought, but a market that can rally in the face of a prolonged overbought reading has some strength behind it. The problem is, the market eventually does give in to the overbought levels and, as you can see at other points of sustained overbought readings, things can fall off quickly once the rallies end.

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

I have been asked how I could stay out of stocks when the market is showing such strength. While it is true that the market is the ultimate indicator, you do have to weigh the odds of what will be best going forward. We all know what has already happened, but what will happen next? That is the question we ask when making an allocation decision.

Each day that the market rallies, remains overbought, shows a divergence in the MACD indicator (see top chart), is in a longer term downtrend, is trading below the 200-day moving average and the 50-day MA is below the 200-day moving average, is another day that I’d rather play defense.

If I had it to do over again, I would of course have bought into the stock funds in early March, but unfortunately, as the trader Alexander Elder once said, we have to look at the right side of the charts. We don’t get paid for looking back at the left side. We have to determine what comes next.

Thanks for reading! TSP Talk market commentary is updated daily on www.tsptalk.com.