Stock Market Analysis

Sunday, August 28, 2011

More Uncertainty Ahead...

First of all, let us thank the Lord for weakening Hurricane Irene as it reached the east coast, preventing the kind of massive damage that was previously anticipated. The Dow made a positive week last week at last after four consecutive down weeks, gaining 466 points on a week on week basis.

In a week where economic data continued to weaken and the threat of a Hurricane Irene right at the doorstep, the Dow staged an impressive rebound out of seemingly no strong reasons. Yes, these are what is known as "Technical Rebounds", which means rebounding on technical reasons rather than fundamental ones. Technical reasons means buying or selling due to the current market support or resistance rather than any real fundamental reasons. Indeed, it is hard to put any fundamental reasons behind last Friday's rally as it came on the back of a worse than expected GDP at 1.0% versus consensus of 1.1% and last quarter's 1.3%.

Clearly last week's rebound was a technical one and an expected one as I mentioned last Sunday. The Dow bounced off its 200WMA as expected of a strong support level. We could continue to see the Dow move higher to retest its 30DMA or even the 200DMA. However, it is unlikely that this is a reversal point. In fact, the market is more and more looking set to repeat the kind of post recovery uncertainty of 2004, bouncing between the 200WMA and 30WMA for an extended period of perhaps a year or more before enough toxic waste is drained from the economy to start a real rally. However, if the Dow breaks below the 200WMA this week, then the market would be in a lot of trouble even though that scenario looks to be of a slightly lower possibility from the way the charts are set up right now. It is still time to be very cautious.

This is the first week of September 2011 which means that we are going to get the heavyweight economic datas once again; ISM Index and Jobs Report. Analysts are expecting the ISM index to retreat below 50, indicating a contracting manufacturing sector, the first time since July 2009 and the first time in this recovery so far. Analysts are also expecting a shrinking in non-farm payroll in the Jobs Report. Indeed, if both reports fails to meet expectations, or even if they do, we could see the Dow revisit the 200WMA as the economy continues to shrink.


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