Stock Market Analysis

Tuesday, May 29, 2012

Suspicious Rally

The Dow gains 125 points today in optimistic trading coming out of the long weekend.

Fundamentals
Long weekends can be dangerous depending on what hits the news and how global market behave on holiday Monday. Global markets ended really well on Monday as no market breaking events happened over the weekend, leading to an optimistic open in the US market today coming out of the long weekend. However, today's rally came on the back of a slew of worse than expected economic data and obvious signs of selling into the strength early in the day. These factors put a big question market on the sustainability and quality of today's rally. In fact, trading volume was relatively low and options traders continued to keep total equities put call ratio between the 0.9 to 1.1 range. All these tells me to be very careful not to interpret today's rally with too much optimism. Unless economic data starts to steady up a bit more, we won't see the kind of sustained rally we would like to.

Technicals
The Dow visited the 12,600 points level today and retreated slightly below it by the end of the day. Yes, as I have mentioned in previous reports, I expect the Dow to go into a somewhat volatile sideways channel bounded by 12,200 to 12,600 points and this could be what is happening now. The market don't have a lot of reason to go very much lower, putting the intermediate trend at risk, nor does it have any strong reason for a sustained rally. This will be an area of congestion until the mess in the global economic clears up a little or at least show signs of clearing up.

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

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