Stock Market Analysis

Wednesday, March 31, 2010

Still Hanging On...

The US market continues to be range bound as the Dow closed down by 50 points today.

Even though the ADP employment report was disappointing today, it didn't stop the market from opening up strongly and staying high for most of the day on great factory orders. Profit taking stepped in towards the end of the day as profit takers continue to retreat out of this grossly over-extended market.

With most of the economic indicators already at pre-recession levels, investors are now watching out only for signs of a recovery in the job market. They didn't get any reassurance today. Investors are likely to continue retreating out of the market tomorrow ahead of the long weekend and jobs report coming on Friday itself.

The US market have been moving largely sideways for a week now and it has certainly taken some of the short term overbought sentiment away. All short term overbought markets can resolve either by pulling back slightly or going into a significant sideways trend like we are witnessing now. The market continues to be amazingly resilient to a pullback as new short term bullish signals continue to appear in stocks across the board. Despite all of these resilience, the possibility of a pullback to about 10,700 continues to be extremely high.

For now, the Dow continues to be in an all out bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Sunday, March 28, 2010

Danger of Pullback Remains

The US market was more resilient than I expected last week. What I expected to be the beginning of a significant short term pullback has ended up with the market moving largely sideways. Through this sideways movement, the market has also managed to digest much of its short term overbought condition. Even though the market is no longer short term overbought, it is still slightly overbought on an intermediate term basis and a pullback to around 10,600 points would allow the market to move much higher in this recovery market in a much healthier way.

My continued expectation of a pullback along with the number of heavy weight economic data that we will be getting this week tells me that its going to be a volatile and tricky market to play in this week (see Stock Market Calendar). I would continue to be cautious about being newly long in this market.

For now, the Dow continues to be in an all out bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Sunday, March 21, 2010

Pullback Begins...

The US market pulled back last Friday as this over extended market runs out of steam at last. The Dow closed down by 37 points, the Nasdaq composite closed down by 16 points and the S&P500 closed down by 5 points. Of course, one negative day doesn't say much but such a significant negative day occurring at such a peak does make it a lot more dangerous than "just a negative day".

The pullback that I am talking about here isn't the kind of long drawn kind of pullback but rather a quick short term one week pullback to digest the short term overbought condition in order for the market to continue higher in a healthy manner. I am not predicting a market top here. This recovery market has a lot more to go before it hits the next top. In fact, what I am suggesting here is a possible entry point following the coming short pullback, so please don't interpret this negatively.

It is going to be a relatively quiet week ahead with the turbulent FOMC + Quad witch week behind us. The big number this week is the GDP 4th quarter estimate on Friday (see Stock Market Calendar).

For now, the Dow remains in all out bull trend.

Tuesday, March 16, 2010

More Interest Free Money...

The US Market rallied today with the Fed's decision to keep providing interest-free (or nearly interest-free) money. The Dow closed up by 43 points today, pushing towards 52 weeks high.

The S&P500 joined the Nasdaq composite in making new 52 week high today, gaining 0.78% to close at 1159. Yes, today's Fed announcement continued to stretch an already over-stretched market and managed to hoax traders and investors watching on the sidelines into the market as volume surged with the rally. So, is this a good thing? Is the market going to continue going upwards? In the mid to long term, YES. But the short term is now extremely uncertain and dangerous.

I see a classic scenario playing out here...

In an already toppy market where more and more investors are sitting on the sidelines for a significant period of time, a sudden "good news" convinced many of them to go back into the market, creating an exhaustion peak and then we know what follows... the slaughter.

The market will make strong and steady 52 week highs but not without first a short term pullback to digest this extreme overbought condition.

For now, the Dow remains in all out bull trend.

Sunday, March 14, 2010

Volatile Week Ahead...

What a week last week! Even though the Dow traded in a more sensible fashion, the Nasdaq composite and the S&P500 continued to stretch their winnings, ending in extremely weak volume and toppy signals last Friday.

Looking at the signals formed by the Nasdaq composite and the S&P500, I have no doubt that this week is going to be pullback week. Even though the Dow moved in a much more sensible fashion so far, it will no doubt be affected by the pullback too. However, if a pullback happens, the Dow is probably going to move down much lesser than the S&P500 and the Nasdaq composite will. In fact, I see short term support for the Dow at about 10,400.

Throwing oil into fire is the fact that this week is Quadruple Witching week. The level of volatility that is going to be in the market this week will no doubt act as a catalyst for the pullback.

For now, the Dow remains in all out bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Thursday, March 11, 2010

Impending Pullback...

The Dow closed yet another sideways day, moving up by 44 points despite early profit taking.

Why do I say that the Dow made another sideways day when a 44 points move is a pretty significant one? Well, thats because it still closed within the trading range set by the past few sideways days, so there are no breakouts. However, the S&P500 and the Nasdaq composite seems to be painting a different picture altogether. They seem to have both broken out to upside and moving higher each day, so shouldn't the Dow follow suit shortly?

Before you get too enthusiastic, let me tell you why I think the S&P500 and the Nasdaq composite are in for big trouble soon.

First of all, even though they are both making new highs, their trading volume continues to contract over this period of gain. This is more revealing when you look at the trading volume of the SPY and the QQQQ, which are ETFs of both indexes. This, together with the huge gap between the indexes and their daily 30MA and the grossly short term overbought condition says, the longer this goes on, the harder the fall will be. Yes, the last time we saw such a huge break from the 30MA along with such gross short term overbought condition was just before the 2008 crash.

No, I don't think the bear market's coming back as the fundamentals are now different. But there will definitely be a significant pullback in order to digest all that overbought condition before the market can move on higher. This pullback would be significantly milder for the Dow as it isn't as grossly overbought as the other two indexes. The Dow would probably pullback to the 10,400 area when it happens and establish a new support. So, this is definitely not the time to be newly short term bullish.

For now, the Dow remains in all out bull trend.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!

Tuesday, March 09, 2010

Market Continues Sideways As Expected

The Dow closed another sideways day marginally upwards by 11 points today.

The US market has been largely sideways since last Friday's rally as expected in order to digest away some short term overbought sentiment. What is evident these couple of days is that there is still a very strong underlying bullish sentiment with the NASDAQ composite moving slightly ahead of the market as usual. However, this moving ahead has increased the possibility of a short term pullback before the market can go any higher as the distance between the NASDAQ composite and its daily 30MA is now way too wide, keeping it in a grossly short term overbought condition. In fact, the NASDAQ composite has already beat the January highs which justifies a little pullback before it will go any higher.

Yes, in fact, options traders are already moving into, at least for the short term, put options as the total equities put call ratio collasped over 20 basis points today (see Put Call Ratio Chart).

So far, the US market has been conclusively technical driven, moving in predictable patterns despite economic data or news. The kind of market that I like.

For now, the Dow remains in all out bull trend.

Sunday, March 07, 2010

Bull Returns!

What a week it was last week as the US market resumes its intermediate and primary bull trend as I have expected. That's right, I never thought the market is going to collaspe back into a bear trend because the signs of recovery is sure and clear. There was the peak unemployment reversal and there was the Primary Bull Trend established by the Dow theory. When the signs are this clear, I never let fear and doubt get in the way.

Last Friday's unemployment rate, although not amazing, was certainly surprising, resulting in the huge rally in the market. Investors have been expecting a slightly higher unemployment rate due to all the job related data that have been released so far. However, unemployment rate remained resilient and stayed at 9.7%. This goes to show again why, unlike the ISM index, there are no officially recognized leading indicators for unemployment rate. All the other data such as ADP report and jobless claims might give an indication on how things are in the economy but they definitely do not directly lead the official unemployment rate data. OK, lets not go into conspiracy theories here.

The Dow rallied a huge 122 points last Friday alone, closing the week up by a total of 240 points or 2.33%. Last Friday's rally is so big that this week is most probably going to be mostly sideways in order to digest away some short term overbought sentiment.

For now, the Dow is in all out Bull Trend.

Wednesday, March 03, 2010

Market Continues Sideways As Expected

The Dow dropped a marginal 9 points today as the US market continued to move sideways as I have expected in my post two days ago.

Yes, the US market has been moving sideways since that rally two days ago on Monday and could be expected to do so until the short term overbought condition of the recent short term bull trend has been digested. Economic numbers have been mixed as well this week so far but with major indicators at pre-recession levels, some volatility should be expected. Investors were also mixed ahead of this Friday's Job report but one thing is for sure, the peak unemployment reversal has already occurred and the economy is recovering, no doubts about it.

One thing is for sure at this point and that is we have come to the end of yet another intermediate pullback like the one back in July 2009 and such pullbacks allow the market to move on higher in a healthy manner.

Monday, March 01, 2010

Market Rallies Despite Disappointing ISM

I am back at last from my conference in Beijing and the US market performed strongly with the Dow gaining 78 points today despite disappointing ISM index.

Amazingly, all three major indexes performed strongly today despite ISM index coming in way lower than consensus. In fact, both the SP-500 and the Nasdaq composite made clean breaks to upside. There is no doubt that the retesting of the 30MA that I mentioned last week has been successful and the market is now ready to resume its previous bull trend.

Expect to see a slight retreat or a few sideways days in the days to follow as short term profit takers do their thing. The turn around pattern has been textbook so far with almost no surprises. Expect to see new highs soon.

Chart of Dow Made Using Telechart. Want Your Own Charting Software? Download FREE Now!