A Dead Cat Bounce?

After a miserable month of June, and a slippery start in July, the markets managed a nice rebound with the Dow reclaiming the psychologically important 10,000 mark, while the S&P; 500 powered through the 1,040 resistance level. It was the market’s first back to back advance since mid-June.

To me, it seems more like a dead cat bounce, as no single catalyst could be identified behind yesterday’s up move. Of course, anytime a market has been beaten up relentlessly, there will be some buyers scooping up what they consider bargains.

I think we simply had become too oversold and negative, which lead to this rebound. Much to the chagrin of the bullish crowd, volume was light indicating prevailing skepticism.

Nevertheless, the rally pushed our domestic Trend Tracking Index (TTI) back above its long term trend line. As I posted during the past week, I like to see a clear piercing of the trend line to the downside before declaring this buy cycle to be over. The clear piercing did not materialize, and now we have moved back above the line by +0.97%.

Yesterday’s sudden rebound is exactly the reason why we give ourselves a little leeway as we approach the long-term trend line either from a level above or from a level below. Doing that clearly avoided a whip-saw signal.

Whenever we come close to breaking a long-term trend line, tremendous bullish vs. bearish forces can be still at play causing this bouncing action around the line while a dominant new trend can’t be identified yet. Sooner or later this bounciness will come to an end, and a new trend will emerge.

We have to be patient and wait for it to become obvious before taking any action. In the meantime, either being out altogether or in hedged positions is the safest cause of action.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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