Stock Market Analysis

Wednesday, August 31, 2011

End of Another Dead Cat Bounce...

The Dow continued to move largely sideways today, closing within yesterday's trading range up by 53 points.

Fundamentals
There was a lot of optimism in the morning session as much better than expected Chicago PMI and Factory Orders led to a wave of early buying. In fact, the market was already pointing sharply higher on the much better than expected Job-cut report announced pre-market. However, is there no reason to be selling off today? Of course there is. ADP employment report turned in worse than expected before market opened. Even though it was largely overlooked in the first half hour, selling into the strength begun shortly after that, taking the market all the way down from its intraday high into the red. A round of late buying took the market back up from the red, making it a slightly positive day today. It seems like today's market action is all about investors buying into the early data and traders selling into the strength and hedging their positions at this critical junction. Bond yields rose across the board as investors reallocate back into equities but total equities put call ratio actually rose in favor of put options trading as traders start to hedge their positions and speculate to downside. Yes, the next two days are critical as the truly market moving heavyweight data will be released in the form of the ISM Index and Jobs Report. Analysts are expecting both data to turn in worse than last month and of course, any negative surprise would mostly like start a new leg down.

Technicals
Traders continue to sell into the strength today as the Dow come up against its 30DMA resistance level, forming a topside inverted hammer signal. A topside inverted hammer is a candlestick that has a long wick on top of a small body near the bottom. Such a signal is an extremely bearish signal especially occurring at strong resistance levels and following other strong bearish signals such as yesterday's spinning top. Short term momentum indicators are also showing signs of the bullish momentum fading. Therefore it is most likely that the market is going to back down to revisit its 200WMA no matter how the economic data turn out over the next two days as it seems like much of the optimism has already been priced into the market through the short term rally (which has no real fundamental support) so far. As such, I would see this junction being a good point to start looking for new short opportunities.

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

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