Tuesday, September 27, 2011

Dead cat bounce or the real thing?

he Euro-tarp rumor came out on Saturday and commodities were thrashed Sunday night before they bottomed.  We don’t think the rally has anything to do with a Euro Tarp rumor (since the real selling in for example copper came a day after)  but a simple squeeze continuation from yesterday’s commodity bottom.      Tech, which has held better than any other sector we follow, is not surprisingly underperforming today as it stands aside and let’s the commodity squeeze take place.     Take note that $AAPL is only up 1%, and for example $CMG $AMZN are both red.    This has all the makings of a vicious dead cat bounce, something we wrote about yesterday.
So how can one tell the difference from a dead cat bounce and the real thing?  Well we can’t.  They both start the same but the latter bases and then keeps making higher lows while the former gives it all back.   If you feel like the leaders should lead the bounce, well, it’s not that simple either since “leadership” is dynamic in the market.   It’s too soon to tell what this market wants to do (the reaction against the 50SMA should yield some information) but we do respect the fact that commodities, which started this whole sell-off, have now short-term  bottomed.
Charts are in a world of chaos and there’s not much to do today for new positions if you trade off patterns.  Don’t fall into the other side of the fear of loss which is the fear of missing:   if this rally is for real then there will be many excellent risk/reward set-ups in the near future.