A Dead Cat Can Fool Even the Wisest Bulls

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Stocks rallied on Tuesday, boosted by higher oil prices and the possibility that the energy sector has bottomed following a seven-month retreat. The Dow industrials soared 1.8% for a gain of over 300 points, and the S&P 500 rallied 1.4% with all 10 of its sectors in the black.

The star of the advance was, of course, the energy sector, up 2.7% as a result of a 7% jump in the price of crude oil to $53.05 a barrel. Shares of Dow components Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) were up 3% and 3.3%, respectively.

The day began with a positive story from Europe where the Financial Times suggested Greece will soften its negotiating stance. Greece’s new left-wing government had indicated that it was in no mood to repay its bailout loans and some even feared the small country might withdraw from the European Union.

In corporate news, Staples, Inc. (NASDAQ:SPLS) jumped 10.9% on a Wall Street Journal story that it was in merger talks with Office Depot Inc (NASDAQ:ODP), which shot up 21.6% on the day.

Ford Motor Company was up 2.5% (NYSE:F) and General Motors Company (NYSE:GM) gained 2.6% after both companies said U.S. sales grew in January.

Factory orders declined 3.4%, which was greater than anticipated.

Gold futures fell 1.3% to $1,259.70 an ounce. And the euro rose 1.3% to $1.1483 against the U.S. dollar. The greenback also fell 1.3% against the currency of its biggest trading partner, Canada, due to rising oil prices.

U.S. Treasury bonds took a beating, suffering the biggest one-day sell-off in over a year as fears over a collapse in Greece abated and higher energy prices eased global concerns.

At Tuesday’s close, the Dow Jones Industrial Average rose 305 points to 17,666, the S&P 500 gained 29 points at 2,050, the Nasdaq was up 51 points at 4,728, and the Russell 2000 gained 21 points at 1,197.

The NYSE’s primary exchange traded 981 million shares with total volume of 4.5 billion shares. The Nasdaq crossed a total of 2.1 billion shares. On the Big Board, advancers outpaced decliners by 3.8-to-1, and on the Nasdaq, advancers led by 2.7- to-1.

Dow Jones Industrial Average Chart
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Chart Key

The Dow Jones Industrial Average reversed from below its 200-day moving average at 17,073. But the reversal’s advance halted just a smidgeon (new technical term) above its 50-day moving average at 17,665.66 and a downtrend line drawn from the December high.

MACD is arching up and ended the day just below the neutral line.

Russell 2000 Chart
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Unlike the Dow, the Russell 2000 broke through its 50-day moving average and came to rest at a downtrend line drawn from the December high. Its MACD issued a new buy signal.

Conclusion

Both the Dow Jones Industrial Average and Russell 2000 reversed from their respective 200-day moving averages, and the S&P 500 (not shown) closed above its 50-day but failed to break from January’s trading range (see previous Daily Market Outlook). Thus, the S&P 500 has not yet negated a possible head-and-shoulders breakdown.

It is unusual for one sector, no matter its size, to have such a broad impact on stocks. And the impact of the energy sector in an already highly volatile market makes analysis more difficult than normal. The saying, “The market will do whatever it takes to confound the many,” is never more true than now.

Despite the bullish turn, there is no confirmation that the market will jump to new highs. Remain cautious and hold back on fully investing since proof is lacking that a rip-roaring bull market is about to break. Dead cats can fool even the wisest of bulls.

One of our readers asked what the upper limit to a dead cat bounce was on the S&P 500. I answered that it was likely that a bounce would top out at the 50-day moving average, now at 2,044.

That number gave way on Tuesday’s close, and now the double-top at 2,065 seems attainable. Keep in mind that buying sprees in volatile markets often take prices higher than chart resistance might indicate, and the opposite is also true. Stocks may fall faster and further in sell-offs than support lines might indicate.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/daily-market-outlook-dead-cat-bounce/.

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