The dead cat bounce

Our View

According to Investopedia, a dead cat bounce is “a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but is quickly followed by a continuation of the downward price move.”

One of the hardest things to overcome is countertrending. When the S&P was going up, our call was “sell the early rally and buy weakness.” Therefore, when the S&P is selling off we should be buying the early weakness and then selling the rallies. Yet that was not our call yesterday as we were looking for higher prices.

We were right and the S&P did rally, but we left out the big part: selling it after the rally ended. Whether we like it or not, the S&P is breaking down. After having its worst week since June 21, the S&P started this week on a downer. After the initial rally it was all downside.

What has made this hard for us is not just the volume but the speed at which the ESU is moving. As the markets have slowed over the last few weeks, so has the speed of the ticks in the ESU. When the ESU is hitting buy stops and running index arbitrage buy programs, the cash should be moving in 40- and 60-cent clips, maybe .20 or .30 clips for smaller programs. However, yesterday the cash was moving too slowly for any real program activity. Most of the selling in the indices was straight-out liquidation. When the level of participation is so low, it doesn’t take much to move the S&P around.

The Asian markets closed lower overnight as stock markets in Indonesia and Thailand dropped dramatically and the Indian rupee reached an all-time low vs. the dollar. Europe is trading lower ahead of the Fed news as well. No one knows for sure that today won’t be a Turnaround Tuesday, but even if it is, that is not going to stop what’s going on.

8-20-2013 changesIn addition to the S&P being down 8 out of the last 13 trading days of August, the month also has the distinction of having the second consecutive 3-day down move and and the first consecutive 4-day day down move of the year. This, my friends, is what you call a change in the price action. Our view: We know at some point the S&P will have to bounce, but we lean to selling rallies. With the Fed minutes coming up tomorrow and the big meeting in Jackson Hole on Thursday, things should really start to pick up.

As always, keep an eye on the 10-handle rule and please use stops when trading futures.

Lastly, please find an hour to look at the PitBull speaking at Amherst College. He has been my friend for a long time but I still love hearing him talk. “A Market Wizard Speaks: Marty Schwartz speaks at Amherst College, Spring 2013.” At Marty’s request, we are offering the full video free of charge to you and the world. Few people trade as well as Marty does. Even fewer are willing to share what they’ve learned.

  • In Asia, 10 out of 11 markets closed lower (Shanghai Comp. -0.62%, Hang Seng -2.20%, Nikkei -2.36%).
  • In Europe, 12 out of 12 markets are trading lower (DAX -1.15%, FTSE -0.62%).
  • Morning headline: “Global Shares Down as Fed Taper Approaches”
  • Total volume: 1.45mil ESU and 7k SPU traded
  • Economic calendar: Redbook, Chicago Fed nat’l activity and earnings from Home Depot, Best Buy, TJX, Barnes & Noble, JCPenney, Saks, Analog Devices and La-Z-Boy
  • MrTopStep Closing Print Video: http//
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