Dead Cat Comes Alive

The Dow broke its daily 200MA resistance today, ending higher by 100 points as New Home Sales pleases.

Fundamentals
The recent encouraging earnings season as well as today's better new home sales figures convinced investors that the market might have found its place of value at last, ending the previous sense of the market being too much ahead of the real economy. Indeed, bond traders have also been actively reallocating back into equities the past weeks as investors find support from the earnings numbers and the Fed's committment to go all the way to zero if that's what it takes to bring the economy back up. This is definitely a good area for some mid term accumulation.

Technicals
What I though of as a dead cat bounce has transformed in nature into a classic intermediate trend reversal, coming up from below the 30MA line, rebounding off it and going on higher. This was the same pattern we saw back in February 2010. However, do not be surprised to see the market turn back down slightly or go sideways for a couple of days before going higher. The 200MA which is expected to be the short term resistance level was broken like it did not exist with the market still a long way from being overbought, we could see the same leg up that we saw back in February 2010 as well.

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

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Dead Cat Bounce Ends...

The Dow slumped by over 261 points last Friday as economic data persistently turned in worse than expected waking investors up to one reality, that the stock market has moved too way ahead of the real economy.

Fundamentals

What happens when expectations were not met by reality? Disappointment results and that was what happened in the market last week and is the overall theme of the stock market the past few weeks. Last Friday, the Consumer Sentiment Index slumped after a 3 months rally, making a 11 months low. This along with last Thursday's dramatic plunge in the Philley Fed woke investors up to a harsh reality, that the coming quarters might be harder than expected. As such, it is not strange for the stock market to revaluate the situation and take back some of those optimism through a period of consolidation like this one.

Technicals
The Dow ended its long dead cat bounce last Friday, turning down very nicely after hitting its daily 200MA and ended slightly below its daily 30MA. However, volume spiked on Friday suggesting a little too much panic which may lead to the market going sideways or pulling slightly over the next few days but as long as the Dow trades below its daily 50MA, I still think its a nice an strong intermediate bear trend in place. Immediate resistance zone would be about 10,400 and immediate support would be about 9700.

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

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Dead Cat Bounce Starts...

The Dow gained an impressive 274 points today in an average volume trading day as store sales turned out much better than expected due sales owing to the unexpectedly hot weather.

Fundamentals
All major indices and most stocks put on impressive gains today apparently on the back of great retail numbers. Both store sales and redbook turned out positive as the hot weather recently seemed to have spurred a good round of consumerism (see Stock Market Calendar). However, today's huge rally doesn't seem insync with the events that seem to have spurred it. Retail sales typically do not result in such an impressive rally. As such, I found today's rally more technical than fundamental.

Technicals

What do you call a huge single day rally that came without some seriously strong economic data backing it? Well, I call it a dead cat bounce. Yes, I see today's rally more of an oversold rebound that I mentioned early this week. The retail sales numbers might have given it some reasons but still, it does not justify such a strong rally. In fact, today's rally has all the signs of a dead cat bounce aka bull trap; average volume, big gains, small reasons, occuring after an extended bearish period. Indeed, if you consider the fact that the market has not made a significant up day since this drop begun back in 22 June, today's "rally" really doesn't look like much at all. In fact, index futures are already leading lower as I write this column. I would not be surprised to see these gains get taken back tomorrow. The market is still in a strong and well structured intermediate bear trend and there is nothing to doubt it with yet. I see the 30 days moving average as a strong short term resistance level, as such, as long as it is not broken, I would not be inclined to believe the market is turning around.

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

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

Welcome Back From Long Weekend!

Welcome back from the Independance Day long weekend! Last week's market action left most traders and investors with a bad taste in their mouth going into the long weekend and only traders that are nimble enough or have a quick trend following trading methodology such as my Star Trading System would have profited from last week's drop.

Fundamentals

Last Friday's unemployment rate number came in beating estimates of 9.8%, turning out an awesome 9.5%, which is the lowest since July 2009 and reinforces the economic recovery scenario. Even though markets still closed lower in a typical pre-long weekend trading pattern, trading was a lot less scary than it was whole week long last week. Bond yield also rose across the board as some short term funds reallocate into equities. Does this mean that this bear trend will end? Well, not just yet since the market has indeed gone too far ahead of the recovery in the real economy. This week is going to be digestion week as investors and traders digest the economic numbers last week, let the market retrace slightly to the mean. As such, we would expect this holiday shortened week to be a slightly positive week (see Stock Market Calendar).

Technicals

The Dow remains in a grossly short term oversold condition with signs of a short term support in place now with the formation of two significant bottom side hammer signals. I maintain my view that the market will go into a dead cat bounce from here. What's a Dead Cat Bounce? Also known as a Bull Trap, it is a short term reversal from a significant downtrend which tempts investors and traders into buying but would quickly dry up and end due to lack of participation, leading to the resuming of the downtrend. Dead cat bounces are great chances to get out of longs and perhaps put on a few shorts.

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

ISM Index Disappoints...

The Dow continued its way downwards today dropping 41 points as uncertainty builds up in major markets worldwide.

Fundamentals
Adding fuel to the already bearish sentiment in the market was a lousier showing in the Jobless Claims and ISM index today. The ISM index is the first heavy weight economic data released on the first trading day of every month. It measures activities in the manufacturing sector and readings above 50 is interpreted as an expanding economy while readings below 50 is interpreted as a contracting economy. The ISM index has been declining for two straight months, its worst showing since it turned around in January 2009. The recent poor showing in major economic data also rekindled the debate as to whether the stock market has moved too far ahead of the real economy.

The uncertainty in the market was also enhanced by uncertainties surrounding tomorrow's Jobs report as well as a long Independance Day weekend coming up.

Technicals
The Dow has declined for 6 straight sessions so far and if we disregard the insignificant rise of 0.05% on 23 June, the Dow would have gone down straight for 8 sessions. All short term technical indicators are in grossly oversold condition and a significant hammer candlestick signal has been formed. A hammer signal is a candlestick with a small body and a long bottom shadow which is created by trading that ended up in the higher price range for the day from a deep sell-off. All these says that a short term bottom might be found and could lead to a dead cat bounce. Yes, there is no such thing as a triple bottom and with the short term and intermediate term bear trend firmly in place now, there is no reason yet to make a significant bet against the trend.

For now, the Dow turns a short term bear trend, intermediate bear trend within a primary bull trend.

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