TSP Talk – 07/28/12

Riding the trading channel

Stocks rallied sharply late last week and turned what looked like was going to be a poor week, into a week of solid gains. The game in Europe continues as this week it was optimism over bailouts that sent the markets higher.

We saw weak economic data with the 1.5% GDP, but that was actually slight better than estimates so the market reacted positively. We also had a better than expected initial jobless claims report on Thursday.

Here are the TSP fund returns for the week of July 23 through 27.

We entered this past week with the S&P 500 in a rising trading channel and it had just pulled back from a test of the upper end.
This is the S&P as we entered the week of 7/23 – 7/27…

And here is how it played out:

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

The S&P moved down to test the lower end of the trading channel again, and within 2 days was back near the top of the channel. The question is, will we see a breakout or will the S&P come back down to test the lower end of the channel?

I’ve been watching the open gaps on many charts since they are so prone to getting filled. The Nasdaq had a large gap and it was filled on Friday, and here is a chart of the Russell 2000 small cap index, which shows the gaps in a more pronounced way.

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

The large gap (green) was filled on Friday and the one above that was partially filled. There is a small gap between 813 and 818 that will also draw some attention.

Once open gaps get filled, we often times see a reversal as the filled gaps satisfied many antsy traders and investors. This may be more info than you wanted, but the reason that is true is because once an overhead gap is filled the traders who were caught by the downside move have now broken even, and that is sometimes a psychological reason to sell.

For example: If you bought a stock at $40 a share and the next day it gaps down to open at $35 a share, you are stuck with this loss and you wish you didn’t make the trade.

After several days the stock starts to make its way back and you think, “If it can just get back to $40 I can get out of what looked like a losing trade and break even.” And with that mentality times millions of shares traded, we start to see selling when the gaps get filled.

I showed this chart last week where the S&P 500 was making higher highs, but the number of stocks moving higher was declining. It happened again and this new move to a higher high of Friday is showing a lower low in the advance decline line.

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

This mean fewer stocks are participating in the rally, which is a negative divergence and could be a warning sign.

This coming Friday we will get the July jobs report and that could set up an interesting week of trading as traders position themselves before the report speculating on the outcome.

If you are wondering how August does historically, it’s not one of the better months.

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

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

Tom Crowley
Weekly Wrap-Ups Archive
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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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