Stock Market Analysis

Tuesday, August 09, 2011

Dead Cat Bounce?

The Dow rallied 429 points today on the Fed's promise to keep interest rates at the present low level all the way to 2013.

Fundamentals
Investors were expecting the Fed to do something more than this and was actually slightly disappointed by the release at 2:15pm, leading to significant selloff. However, the reality of the news soon set in and spurred bargain hunters to step in, lifting the market all the way to its close. Indeed, investors have been worried about the Feds raising rates for a while now and this promise really take that concern away and give the bulls some reason to celebrate. However, that didn't stop some investors from selling on the strength and returning to bonds, depressing bond yields significantly across the board once again. Indeed, times like this makes alot of investors sell on the strength. In fact, total equities put call ratio surged to a high unmatched since Sep 2008, which ushered in the final down leg of the 2008 crisis. Clearly, it is still a scared market with plenty of investors selling into any bit of strength. However, the sense of the market being short term oversold is also overwhelming in the market and it would not be strange to see a couple of days of dead cat bounce from here. Yes, the cat remains dead until something significant changes in the fundamentals of the economy, which remains extremely weak right now. Yes, we are in a news/events driven market now and every new development on the significant issues will change the outlook of the market. Such is the kind of market to be investing for the long term (5 to 10years) on significant retreats, very nimble day traders who can react instantly to breaking news or sensible people who just want to stay on the sidelines for now (At least that's what my Star Trading System is doing right now).

Technicals
Today's rebound is indeed a good get out time for short term traders who has yet to cut loss. Why? Because even though today's rally was a significant one under normal market condition, its 400+ points fade in comparison with yesterday's 600+ points drop and continues to make a lower high and a lower low. Unless the market follow up with a significant rally beating the high of yesterday's 600+ points candle, today's rally means nothing and the retest of the 10,000 points support level stands. Even if tomorrow ends up positive, it could still be a short term dead cat bounce that does nothing more than create a week or so of excitement before turning back down lower. As such, any strength remains a good time for getting out of longs so that you can wait out the uncertainty. Yes, it is an intermediate bear trend now and inclination will remain bearish until something significant changes in the economy and the charts.

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

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