Stock Market Analysis

Tuesday, August 16, 2011

Dead Cat Bounce Ending?

The Dow pulled back 76 points on disappointing sales data today, ending the 3-day rally.

Fundamentals
Sales data today turned in worse than expected, leading to a negative opening in the US market. The negative opening was also reinforced by global markets taking a hit on European debt issues before US market opening. Investors also went back into the slightly higher bond yields, depressing bond yields across the board once again while options traders continue to maintain a largely bearish stance with a higher than par total equities put call ratio. The market strengthened in the afternoon, taking it off its lows with the AAA rating affirmation by Fitch. Indeed, Standard & Poor's is only one of many credit rating agencies and is the only one which has downgraded US debt rating so far. Investors are clearly cautious ahead of Thursday's bout of leading indicators and jobless claims report. Economic numbers have been deteriorating the past couple of months and further deterioration in the Thursday numbers would certainly fuel the ongoing bear trend. So far, Monday's Empire State Index has already turned in worse than expected. Indeed, this bear market does have real fundamental issues behind it rather than just a credit downgrade issue.

Technicals
The Dow pulled back slightly today which is typical after such a powerful 700+ points 3 days move. Short term bullish momentum continue to rise into today's move and along with its slightly higher high and higher low, it seems like this dead cat bounce still have a couple of days to go. However, this is also the area in every dead cat bounce where the market could make a nice evening star formation and continue its way downwards, depending on how the next day close. If tomorrow closes higher, then the dead cat could limp along for a couple of days more. If tomorrow closes lower, than odds would be that the market would continue into its bear trend from here. As such, for the short term, the market remains inclined to downside with limited upside potential.

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

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