TSP Talk – 06/30/12

Europe and the dollar

It was a busy week for the market as we saw questionable economic data, an initial sell-off and recovery after the healthcare ruling was announced on Thursday, and of course the big rally on Friday after a deal was struck among European leaders to help struggling eurozone banks.

Here are the TSP fund returns for the week of June 25 through June 29, plus the final monthly figures for June.

Although it is not a perfect example, the S&P 500 seems to be taking the path of this typical outcome of an inverted head and shoulders pattern.

The pullback was not to the neckline as we would normally see, but instead it was the 200-day EMA (exponential moving average), which was about 10 points below the neckline, that acted as support before resuming the rally.

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

We should find out if it remains in a trading range between 1315 and 1360 pretty quickly as it it testing the high end of the range now. If it can hold above the declining resistance line (top of the apex), we could see a push back toward 1400 in July. The black apex / triangle formation is a tricky one. Many times the initial breakout from an apex is a false one, and the market reverses and actually breaks in the opposite direction below the apex support. That is what I will be watching.

The positive news out of Europe helped push the dollar down to its worst one day performance since last October.

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

From a technical analysis standpoint, the dollar fell right into support at the 50-day EMA and the old descending resistance line. But according to sentimenTrader.com, after a one day sell-off this large in the dollar, after having been so close to recent highs, the dollar tends to struggle for up to three months.

Two months later, the dollar was positive only 25% of the time, with an average return of -1.6%. If you have been watching the market over the last few years you know that the correlation between the dollar and the stock market has been negative, meaning if the dollar went up, stocks went down – and if the dollar was down, stocks went up. That correlation is not always true, but it has been pretty strong the last few years.

So, if that correlation holds, and Friday’s sell-off in the dollar is a precursor to a weak dollar over the next few months, it could make for a decent summer for stocks.

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

Tom Crowley
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The legal stuff: This information is for educational purposes only! This is not advice or are commendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.

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