Stock Market Analysis

Wednesday, August 17, 2011

Dead Cat Bounce Ends

The Dow moved sideways today, closing marginally higher by only 4 points as the reality of worsening economic data begin to set in.

Fundamentals
Early strength in the market gave way quickly to an all out short term profit taking as investors sell out of equities and returned to the safety of bonds, depressing bond yields further across the board. Yes, the reality of worsening economic numbers seem to be setting in right now ahead of tomorrow's round of important leading indicators and jobless claims, which will no doubt start a new leg down if they turn in decidedly worse than expected as well. Options traders continue to have no doubt that this is a bearish market by keeping total equities put call ratio above par. My old question remains... with economic performance back down to where it was in 2009, would the stock market go back down to that level as well?

Technicals
Even though the Dow closed higher today, there is little doubt that the dead cat bounce has ended and the next leg forward is downwards. In fact, the Nasdaq Composite, which typically moves ahead of the Dow and S&P500, has already made a significant down day, completing the evening star formation I spoke of yesterday. A negative close tomorrow on the Dow will be the confirming signal. Short term support is around the 10,700 area with a revisit to the 10,000 points area if broken. That will also turn the primary trend around to bearish.

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

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