Stock Market Analysis

Monday, August 15, 2011

Dead Cat Bounce Continues...

The Dow gained 213 points today despite a far worse than expected Empire State Index.

Fundamentals
US market opened up strongly and continued powering upwards all the way to its close along with a wave of optimism that swept over global markets before US market opening. In fact, the far worse than expected Empire State Index released before market opened today didn't seem to move sentiments one bit. Analysts were expecting the Empire State Index to rebound to a +1.0 from last month's -3.76 but it turned out a grim -7.72 instead. It is the Empire State Index's worst showing since November 2010 and marked the third consecutive negative month. The last time the Empire State Index spent so many months consecutively in negative mode was back in 2009 before the end of the 2008 market crash. Indeed, most heavyweight economic data has fallen back to the pre-recovery state and today's Empire State Index, the first of the 3 major leading indicators for the ISM Index, truly cast a shadow on the next ISM Index. Truly fundamentals are not behind today's move, making it more technical than fundamental in nature. Bond yields rose slightly across the board as investors continue to sell out of the higher bond prices and low bond yields. Total equities put call ratio shows that options traders are still very much in the bearish mood, unmoved by today's "rally".

Technicals
Today's rally is definitely the technical followup to last Friday's move, playing out the dead cat bounce that I mentioned yesterday. Indeed, whenever the market move ahead upwards within an intermediate bear trend on a day of horrendous economic data, it is most likely nothing more than a bull trap or a simple oversold rally. Indeed, with the fading trading volume, it is not hard to see the true nature of this "rally". The Dow would need to test and break its 30MA once again before it can resume its bull trend. For now, odds continue to favor a failure at that level and a continuation of the intermediate bear trend until economic data start to recover.

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

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