For the second week in a row, the S&P 500 bottomed out on Wednesday, then closed near the high of the week on Friday. I don’t know what the significance of that might be except that in market timing and technical analysis, we are sometimes just watching out for patterns because they tend to repeat themselves. It gives us some possible hints as to what may be happening next.
Here is the prior week’s 5-day chart…
Here are the updated TSP fund returns through December 7:
The S&P 500 is above the 3 major exponential moving averages (the 20, 50, and 200 day EMA’s) and has created a bullish inverse head and shoulders pattern. As I mentioned above, we look for patterns because they tend to repeat themselves.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
An inverted head and shoulders pattern tends to resolve itself in one of two ways. The first is most common and it involves a breakout above the neckline, followed by a pullback to test the neckline and, if the support of the neckline holds, another leg higher.
The second most common out come is a failure at the neckline, followed by a test near the middle of the head. In our current situation, that would probably land the S&P 500 near the 200-day EMA. near 1380.
The market is heading into the less favorable two-week period of December. We might expect some kind of positive resolution to the fiscal cliff negotiations to push stocks higher, but the market has held up rather well recently (buy the rumor), which means it may have already priced in a resolution so it is possible that, we could see a “sell the news” reaction. That would probably result in the 2nd inverted head and shoulders scenario above.
On the other hand, if the fiscal cliff resolution somehow opens the door to faster economic growth (which may be a long shot), the market may never look back. In that case the top inverted head and shoulders scenario could be more likely.
Good luck, and thanks for reading. We will be back after the weekend with a full market commentary on www.tsptalk.com/comments.html.
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