Stock Market Analysis

Sunday, July 31, 2011

Turn Around Imminent

The Dow continued into its 6th down day last Friday, closing the week lower by 537 points or 4.2%, governed largely by fears surrounding the US debt issue.

Indeed, last Friday's GDP and Chicago PMI did nothing to help the already negative sentiment in the market as both data turned in poorer than expected. Overall, economic data continue to be shaky along with the US debt issue, creating the perfect bearish atmosphere for the market. In fact, bond yields ditched strongly across the board as investors rushed back into the safety of bonds and options traders pushed the total equities put call ratio all the way up to 1.2 in favor of put options trading in a sudden surge. VIX also jumped 6.36% last Friday. However, everytime such a sudden change in all three indicators happen on a single day, it usually means a blow off day and that the trend might just turn around the very next trading day.

Indeed, on the technical front, the Dow also made a strong blow off day with volume surge and a bottom side hammer formation last Friday. This, together with all 3 of the above mentioned indicators displaying blow off behavior and the fact that the market is already down 6 straight days, we could see a turn around as soon as Monday itself. As I have mentioned last week, the Dow is now in a volatile sideways trend within a 12750 and 12000 channel. In fact, the 12000 support is reinforced by the 200MA itself as well. So there is no doubt a short term bottom is here.

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