Stock Market Analysis

Wednesday, July 06, 2011

Going Deeper Into Overbought...

The Dow continued to climb today by 56 points carried by better than expected sales figures.

Fundamentals
Redbook posted a year on year store sale gain of 5.2% versus 2.5% last week. This is an extremely strong sales figure which is somewhat supported by the weekly ICSC-Goldman Store Sales' year on year figure. Consumers is the backbone of the US economy and a recovering consumer is a recovering economy. This is probably what gave some investors the guts to chase into this already short term overbought rally. However, not all investors think the same way as bond yields collasped across the board due to reallocation back into the safety of bonds. Options Traders also continue to keep the total equities put call ratio above par in favor of put options trading. Furthermore, the VIX actually rose today even as all three major indexes were up. Under normal circumstances, the VIX move inversely to the movement of the S&P500, however, when the VIX move in the same direction, it usually mean that there might be a change in short term sentiment shortly... in fact, as soon as tomorrow. This happened back in 29 April 2011 when all three major indexes were positive along with a positive VIX. This led to a one week slide from the next trading day onwards. (see bond yield curve, total equities put call ratio and the VIX at http://www.optiontradingpedia.com/option_trader_hq.php )

Technicals
The Dow continued to move upwards despite being in short term overbought condition. There is almost no doubt by now that the bull trend has resumed and this "Intermediate Correction" has ended. The only question is when or if we could expect a slight pullback in order to set up good entry points. Even though the Dow is used to powering onwards and upwards in deep overbought condition in strong markets, I am not sure if this is that kind of market condition. Today's market condition continue to be ruled by a lot of fear and changes in the macro-economic situation. Putting all the odds together seem to suggest that the Dow should make a slight retreat before it can move on higher. This is particularly true with the NASDAQ Composite which has made its 7th straight up day today.

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