Stock Market Analysis

Monday, July 05, 2010

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.

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