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Beware Of Dead Cat Bounces

Adam Hewison - MarketClub

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What is a dead cat bounce? It is simply a rally from a very oversold condition. That's the case today as many of the markets have literally gone straight down in the first weeks of 2016 and contributed to the worst start of any year in the history of trading.

A dead cat bounce does not mean a trend change or that you have made a major bottom in the market. Technically, a dead cat bounce is really just a short covering rally from a market that is very oversold. If and when the major indices are going to reverse the trend and move back up, they are going to have to do quite a bit of repair work to change the negative technical picture that we are currently facing.

After the close today Netflix.com Inc. (NASDAQ:NFLX) will report earnings - the current technical picture for this stock is mixed. The longer-term trend for Netflix is positive with a green Trade Triangle in place. However, the intermediate-term trend is down with a red weekly Trade Triangle. I would suggest standing on the sidelines at the moment.

I thought I would look at the major market sectors and see which way they are trending today.

Healthcare

Of the 10 stocks that I track in this sector, only 4 are showing positive monthly Trade Triangles. I think this sector is indicating a sidelines position. The 4 stocks that are still in a long-term bullish trend are Amgen (AMGN), Johnson and Johnson (JNJ), Bristol-Myers Squibb (BMY) and Medtronic PLC (MDT).

Consumer

The consumer sector is doing a little bit better, but still indicating a sidelines position. 5 of the stocks that are still in a long-term bullish trend are Coca-Cola (KO), Proctor & Gamble (PG), Philip Morris (PM), Pepsico (PEP) and Altria (MO).

Service

Out of the 10 stocks I track in this sector, there are only 5 that are still in a long-term bullish trend. They are Amazon (AMZN), eBay (EBAY), Visa (V), Home Depot (HD) and McDonald's (MCD).

Energy

The energy sector has been the weakest sector. Out of the 10 major stocks I track, only one stock still has a positive long-term trend and that stock is Chevron (CVX). This sector is indicating a strong downtrend.

Financial

The financial sector, like the energy sector, is indicating a strong downtrend. Out of the 10 stocks I track only one, American International (AIG), is showing a monthly green Trade Triangle.

Technology

This sector is indicating a sidelines position. There is however, one stock in this sector that is still in an uptrend despite the battering of the markets in general and that is AT&T (T). Other stocks that are still in positive long-term trends are Alphabet Inc (GOOG), Microsoft (MSFT), Facebook (FB) and Verizon Communications (VZ). However, they are showing a red intermediate-term downtrend based on a red weekly Trade Triangle.

Industrials

This sector has 4 stocks that are in long-term uptrends based on the green weekly and monthly Trade Triangles, General Electric (GE), Lockheed Martin (LMT), Illinois Tool Works (ITW) and Precision Castparts (PCP). Overall this sector is in a sidelines position.

Utilities

This is normally considered a defensive sector when markets go down because of expected and safe dividends. This sector is also indicating a sidelines position. There are 3 stocks in strong positive long-term trends and 3 stocks that are in weaker positive longer-term trends. The 3 strongest stocks in this sector are, MDE Energy (MGEE) and Niska Gas Storage (NKA) and Empire District Electric (EDE). The 3 weaker stocks that have intermediate downtrends are Otter Tail (OTTR), Laclede Group (LG), Ei Du Pont De Nemours (DD). Most of the sectors I track are either heading sideways or heading lower. There are no standout sectors at the moment.

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