Stock Market Analysis

Thursday, November 10, 2011

Dow Caught In A "Wedge" Once Again

The Dow gained 112 points today on better than expected economic data.

US market celebrated a much better than expected Jobless Claims and Consumer Comfort Index, getting off to a strong start, beat short term profit taking in the morning session to close higher. Jobless Claims unexpectedly made its lowest level since April, dropping to 390K from last week's revised number of 400K. Investors cheered to the news and reallocated strongly back from bonds as bond yields rose significantly across the board. However, general trader's sentiment still seems slightly negative as there was obviously short term selling into the strength and total equities put call ratio persisted above par in favor of put options trading. An above par total equities put call ratio always tells me that the market is still generally uncertain or bearish and can expect to meet all kinds of resistance, which we have witnessed so far. The US market is also caught in a wedge between bad news from Europe and good news on the economic data front with every positive data giving rise to a positive day and then something in Europe taking all that gains away soon. Indeed, until the European issue reaches a firm resolution, the market will not find a committed direction.

Indeed, the Dow is literally caught in a "Wedge" formation right now. A Wedge formation is created when prices go sideways in a narrowing channel. The Dow is clearly caught in a wedge between the rising 30DMA and the 12,000 points level right now. Such formations suggest uncertainty in the market which we all know comes largely from the European side. However, the good thing is that such a "Wedge" or "Pennant" formation occurring along a rising price trend usually breaks out in the direction of its previous trend, which is upwards in this case, when the uncertainties get resolved. As long as the 30DMA level holds up, the short term bull trend isn't in much of a danger.

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


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