Stock Market Analysis

Tuesday, April 27, 2010

Panic, Panic, Panic

The Dow ditched by a huge 213 points today as the Greek debt problem sent waves of panic across the trading floor.

Soveriegn debt problems always cause worldwide panic as memories of the Russian debt default comes back to the minds of the long time veterans. We saw the same thing in the Dubai problem as well. However, we do not see the Greek debt problem being of that scale and certainly would not have that kind of world wide impact. I certainly do think that the Greek debt issue is merely an excuse for investors to finally decide to get out of an extremely short term over extended market.

Like I mentioned two days ago, the market is still short term over-extended and it is now pending a strong intermediate pullback like the one we saw back in January. I was wondering what might be the catalyst for such a pullback and this Greek debt problem might be it. Investors were in all out panic; Bond yields collaspe across the board as investors reallocate, VIX shot up by over 30% and trading volume was way higher than average. The Dow is once again at its 11,000 psychological level which now coincides roughly with its daily 30MA. If this level fails to hold, short term support will be at its daily 50MA level of about 10,750.

For now, the Dow returns to a short term neutral trend within an intermediate and primary bull trend.

Sunday, April 25, 2010

Dow Breaks Out!

The Dow staged a breakout of the 11,140 points short term price ceiling last Friday, closing up by 70 points at 11,204.

Last Friday's gain came on the back of great housing numbers last week with both existing home sales and new home sales turning in stronger than expected. The housing market has been in the duldrums for way too long and a recovery in this sector would definitely be beneficial to the overall economic recovery.

On the technical front, there is nothing much to doubt this breakout as it has good volume and form. However, don't be surprised to see a few sideways or slightly negative days before it continues upwards. Traders also need to be nimble to react to a possible intermediate term pullback like the one we saw back in January. with the market this extended without any significant pullbacks along the way, we can expect the next pullback to be a strong one.

This week is FOMC week where the Feds meet to decide the financial fate of America (and the world?). The Feds will be announcing their decision on Wednesday (see Stock Market Calendar) and are expected to keep rates steady. So yes, if they raise target this time round, investors will be caught off guard and we will see that big pullback I talked about. However, that is merely a distant possibility right now.

For now, the Dow resumes an all out bull trend.

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

Wednesday, April 21, 2010

Profit Taking Continues into Earnings Season

The Dow gained a marginal 7.86% today as profit taking continues in this great earnings season.

Yes, lets go back to basics and remember that the market is a discounting mechanism, not a feedback mechanism. As such, all future expectations would have been priced into the market before it actually happens and then if it does, profit taking sets in, resulting in a largely sideways market. If results come in worse than expected, the market will take back those gains that were priced in previously, resulting in a drop.

One good thing we see today is that advancers are now above decliners at last, giving a shade of strength to this short term toppy market. Since earnings releases so far are largely better than expected, we could see this market go sideways a bit more before bouncing off its daily 50MA for new highs.

Even though short term outlook is still very healthy, lets remember that the Dow is now at its weekly 200MA + 11,000 points psychological resistance level, so, lets not be surprised to see some struggle at this level before the Dow do a real breakout.

For now, the Dow remains in a short term neutral trend within an intermediate and primary bull trend.

Monday, April 19, 2010

Slight Pullup Day...

The Dow ditched by 125 points last Friday as the huge dip in put call ratio earlier last week predicted. Indeed, market usually falls when traders are most optimistic. The total equities put call ratio has been returning to normalcy these few trading days into a more balanced 0.91 today as the Dow pulls up slightly.

Why do I call what appears to be an huge 73 points gain a "slight pullup"?

Well, for one a slight positive day is totally normal following huge single day declines and so far, decliners continue to lead advancers today. In fact, from today's intraday market action, it is obvious that the Dow has yet to break the gravitational field of the 11,000 points resistance zone. Indeed, one cannot expect such a significant psychological resistance level to be broken easily. I would not be surprised to see the Dow continue largely sideways this week in order to muster enough energy for a real breakout.

For now, the Dow turns a short term neutral trend within an intermediate and primary bull trend.

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

Wednesday, April 14, 2010


The Dow made a breakout today by a huge 103 points on returning consumerism indicated by higher than expected retail sales.

The US market celebrated the return of consumers as retail sales beat consensus of 1.2%, turning in an actual 1.6%. Consumers form the basis of the US economy and the return of consumers is one of those end of recession signs most conservative analysts and investors are waiting for. Market opened northwards, met with some resistance before an inline business inventory number gave it a push that never looked back. All in all, today's economic data is telling us that jobs and buying may be back soon.

Even though today's market action is to be celebrated with many mid and small cap stocks posting tremendous gains, it is a day which must be taken with a big pinch of salt. Why? Because the optimism is just too overwhelming. In fact, the total equities put call ratio made a low not seen since Aug 2009, indicating a rush into call options on bullish speculation (see Put Call Ratio Chart). Yes, eventhough call options can be bought for many different purposes, speculation still remained the top purpose. What usually follows such overwhelming optimism is a short term pullback.

Looking back in August 2009, the put call ratio entered the 0.5 region on a single day rally of 155 points on 21 August. It was then followed by a retreat that took back all the gains and more before the bull trend resumed in September. This means that the Dow may not have cleared the gravitational field of the 11,000 points level yet. As such, I would be looking to close some of my more profitable short term positions, especially those that gained over 5% today.

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

Monday, April 12, 2010

11,000 Points Looms...

The Dow made a dash for new high last Friday and closed up 70 points, ending the week at 10997 points, just a tad short of 11,000 points.

It seems like the 72 points drop last Wednesday was the single day drop I was talking about that will give rise to a new high. The Dow is coming up against a significant psychological resistance level, the 11,000 points level. I would expect some volatility around this area before the market makes further highs. In fact, the 11,000 points level coincides with the Dow's weekly 200MA, which again is expected to be a significant resistance level. As such, I would expect a few week of volatility around this level before it ultimately breaks out.

It is options expiration week ahead again (see Stock Market Calendar) with the top movers this week being the Empire State Index, Philley Fed and Jobless claims on Thursday. The Empire State Index and Philley Fed are already in pre-recession levels so I hope investors do not take volatility in those numbers too hard. Jobless claims remain much higher than pre-recession levels but its 4 weeks moving average has exhibited a steady and healthy downtrend.

For now, the Dow turns an all out bull trend.

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

Wednesday, April 07, 2010

Back to Bonds...

The Dow retreated 72 points today as investors rushed back into the safety of bonds.

Investors rushed back into the 10yr bond auction today in the face of this extremely short term overbought market and depressed bond yields across the board. Options traders also returned from a strong call options bias to a more balanced put call ratio on today's market retreat. In fact, this is the strongest single day retreat the Dow has made since this strong rally begun back in March.

From the magnitude of today's retreat, a healthy pullback to the 10,750 level seems imminent. Yes, the market needs a nice little pullback such as this one in order to set the stage for more buying. Most investors who are bullish in the mid and long term won't want to enter when the market is this extended on the short term. As such, a pullback is necessary ingredient to encourage buying and higher highs.

For now, the Dow remains in short term neutral trend, intermediate bull trend and primary bull trend.

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

Sunday, April 04, 2010

Still Sideways...

The sideways trend continues into a second week last week as the Dow continues to trade within its 10955 - 10800 short term neutral channel.

However, the two weeks of sideways trading has allowed the US market to digest most of its short term overbought condition and should be up and running again within these couple of weeks. For this week, I still see the Dow sideways or even slightly downwards. Perhaps not a strong one but at least a significant single day pullback.

The market is going to greet a positive open on Monday as last Friday's unemployment rate did not move higher as some have feared. Yes, make no mistakes, peak unemployment rate happened back in October 2009, marking the worst this recession can get. The economy is on the recovery but at a much more gradual and modest pace. The mess that has been created in the economy is going to take many more years to completely unwind.