Stock Market Analysis

Monday, July 02, 2012

Dow Completes Reversal

The Dow pulled back slightly by 8 points today as ISM index disappoints.

Fundamentals
Something changed fundamentally last Friday which completely changed the previously uncertain mood of the market; The EU deal. The agreement struck at last Friday's meeting opened the first real door to resolving the EU issues and will definitely benefit the global economy well executed. This led to a huge rally last Friday and a largely sideways day today despite the lousiest showing in the ISM index since 2009. The ISM index went below 50, suggesting contraction, for the first time since the recovery begun in 2009. This was largely foretold by all of the regional fed releases last month. However, such a dismal number would normally have a much bigger negative effect on the market. This shows that there are optimism enough in the market arising from last Friday's event to almost completely offset the effect of such a lousy ISM index. However, investors did retreat to bonds today, bringing down bond yields across the board and options traders continue to be undecided, keeping the total equities put call ratio between the 0.9 to 1.1 range. This is also a holiday shortened week with the Independence Day holiday coming up on Wednesday and a halfday market tomorrow, so we should not see strong buying tomorrow.

Technicals
The Dow completely changed its volatile sideways neutral behavior and completed an intermediate turnaround pattern with last Friday's rally, successfully re-testing the 30MA (which I previously thought not possible) and rebounding. This pattern marks the end of the intermediate correction and the resuming of the primary bull trend. However, with such a strong rally last Friday, do not be surprised to see some profit taking, taking the market largely sideways over the next few trading days.

For now, the Dow turns a short term bull trend within an intermediate bull trend and primary bull trend.

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