1) Surge in price of oil (rising by $4.58 to close at $126.77), giving a boost to the 2 big players in DOW - Exon and Chev
2) Gains in the financial sector thanks to a string of policies to prop up financial stocks
3) Rosy ADP employment figures
S&P 500 went up by 21.06 points (1.67%), COMP went up by 10.10 (0.44%), RUT went up by 4.31 (0.6%), ER2 (Sep settlement) is down by 0.06%
So, what do I expect to see in the sessions to come?
First, on market internals: COMP and RUT are showing weakness relative to DOW. ER2 (which is what I'm trading now) is now in negative territory. Price of oil is apparently affecting the small caps. I'm expecting ER2 to trade down today.
Now, on the market in general:
Government's advance reading on Q2 gross domestic product is due to be out today at 830am EST. Consensus is 2.3% , Q1's fig was 1%. Thanks to tax rebates, figs for Q2 might just look like there's some growth in the economy.
In the long run, the surge in oil and other commodity prices will continue to put pressure on consumers. In the absence of any transformational remedy to the credit and housing problem, and stabilizing oil prices, it is difficult for investors to get optimistic about the economy.
The recent rally that we saw was due to a number of factors that are not hinged on a truly healthy economy. Here are some of my reasons for not being optimistic that a bullish reversal is anywhere in sight:
1) Financial sector
To recap, market rallied for the past few days mainly because of a soaring financial sector. I don't know about the others, I personally won't keep any financial stocks. With the expiry in mid Aug of such initiatives to prop them up e.g SEC's temporary restriction on naked short selling on financial institutions, I'm expecting their happy ride to be over by then.
2) Although ADP employment figures were much better than expected, I've only been seeing news of layoffs by the thousands from big names. Am I the only one that's been missing out something?
3) Homebuilders sector closed in negative territory, small caps companies not doing all that well (diverging negatively from DOW and S&P), US' MONUMENTAL Budget and Trade Deficit, etc etc
Going back to yesterday's late day rally - seems that part of it was due to institutional investors adjusting their holdings before market closed, typical of them to do that in times of volatility.
Now, let's look at some charts.
DOW Daily
What I see here:
Bear Wedge, declining volume since its low on Jul 15 - suggest that rally is probably due to bears taking profit rather new bulls coming in
Bearish negative divergence is still there - reinforcing my belief that this is simply a short-term rally in a bear trend
Price moving towards Fib 61.8 - countertrend and corrections typically end at Fib retracement level of 61.8%. So, unless DOW goes up beyond around 12,250 (the 61.8% Fib retracement level of the fall from May to July) and stay up there, I'm going to continue to see the current rally as just a mishmash of bears' profit taking and opportunists jumping in to ride on the current rally in the financial sector (which, as I mentioned, would last only for as long as the government is willing to continue to bail out irresponsible companies)
In a trend like today's, any news, good or bad, WILL MOVE the market. A volatile time indeed.
S &P chart mirrors the DOW chart so I shan't show it. There are no divergence between DOW and S &P.
Since I'm trading the ER2, I'm looking at RUT and ER2 charts too.
RUT Daily
What I see:
Bear flag, bearish divergence for Jul 29 - 30, bearish hidden divergence (suggesting downtrend that began in Jul 07 will continue).
Fib 61.8% retracement level from fall of early June to July hit - accompanied by 3 spinning tops, I'm thinking likelihood is that party's over for the bulls
ER2 (Sep Settlement)
What I see:
Nothing too different from what I see in my RUT chart.
When I add in the factor of RUT and ER2 showing relative weakness against DOW and S&P, I can't help but be bearish. Both towards RUT and the general market, especially with Nasdaq showing weakness against DOW too.
What this is telling me is that DOW is pretty lonely and will soon join the others.
But as I've mentioned above, the rally is still on, and we should see the general market (except maybe russell and nasdaq...) moving up today (From DOW daily chart, we can see that MACD lines are moving into positive territory). Don't know about tmrw though, since 1 Aug has traditionally being bearish.
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