MDM - Dead cat bounce?

Published : September 18 2011 at 8:49 ET

Signs are showing that the latest bounce which began on September 12 is a dead cat bounce for the following reasons:

1) Friday's options expiration resulted, as is typical on such days, in exaggerated trading volumes across stocks and indices. Short covering of positions has been evident while there has been lackluster buying of leading stocks. Further, very few leading stocks have formed constructive bases and are moving to new highs.

2) Both the price of oil and the CRB index which tracks the price of a basket of commodities is showing much weakness, both having undercut their 200-day  moving averages several weeks ago. This is an indication that demand on such commodities is weak and thus telegraphing that we could be headed toward a global recession.

3) The small cap Russell 2000 usually outperforms the large cap NASDAQ 100 in uptrends. Yet in the latest bounce, the Russell 2000 is underperforming. Thus the fail-safe in this case is being governed more by the Russell 2000 than the NASDAQ Composite. Nevertheless, the Market Direction Model is indeed close to switching should the Russell 2000 move slightly higher from current levels.

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