Dead Cat Bounce in the Making

Last night, the European Union unveiled a massive €750 Billion ($962 Billion US) bailout plan to save Greece. As a result, financial markets surged on May 10. European markets shot up between 6 to 10 per cent, with North American markets surging 3 to 4 per cent after a week of severe losses. Asia rose between 1 and 2 per cent as well.

What doesn't make sense to me is that for the past few weeks, it has been known that the EU would bail out Greece, yet the market continued to drop on the contagion concerns. I even hinted it last week in my blog titled "World Markets Tumble that the EU would do all they could to prevent the fall of Greece. Then, earlier today, the bailout was announced; markets rallied as if this information was new to the market. Everyone seemed so delighted today to see an up market, that the end was over, but it seemed like a sucker's rally to me.

One look at the move today and it might be a dead cat bounce, that is, a short-term rally in the value of a declining stock or stock market. The rumours that Greece would get a bailout became official, but concerns and fears still linger. Asian markets rose on Monday, but in Tuesday morning trading, early gains are already wiped out by the lunch break (Yes, Asian markets get lunch! I wish that was implemented in North America).

With exception to the predicted bailout now reality, the working fundamentals have not changed. Concerns in China's growth are still a plenty (a future posting, possibly tomorrow), the bailout makes no guarantees and additional funding may be needed, and although US economic indicators are improving, the rate is not to the world's liking.

Technical indicators have not yet turned around either. The upward momentum of today's market stalled in the first thirty minutes of trading and gradually dropped until the last half hour, a sign of hesitant buyers perhaps. The Dow broke below the 50-day moving average on Thursday, and The Dow did not break above the 50-day moving average today. Technicians consider a sell or buy signal confirmed if the security in question does not go back to the level of support or resistance. Tomorrow is the third day, and if it does not trade and close above that level, expect another bad month of May.

My friend Christian also pointed out that the Volatility or VIX Index, which measures the values of short-term options on a given index and creates a calculated "volatility value," is entering a golden-cross signal, a charting pattern that occurs when a short-term (50 days) moving average crosses above a longer-term (200 days) moving average, indicates an upward move. In this situation, an upward move in the VIX typically means a downward move in the market.

A friendly reminder should be issued here as well - Trade cautiously. The US Bailout of 2008 had very positive first reactions, but was followed by a 20 per cent drop over six months. We could see a repeat of continued selling pressure as Greece concerns remains.