As we suspected following the dramatic plunge in markets over the previous two sessions a bounce was likely. On Tuesday, stocks showed a bounce back to the upside, but nowhere reaching sufficient gains to even measure as an offset to the huge losses. This kind of bounce is often referred to as a “dead cat bounce”, suggesting that after such dramatic selling even a dead cat will bounce from such a high fall.

The major indexes finished the day near the highs of the day. The Dow surged up 269 points (+1.6%) to 17,410, the Nasdaq soared 97 points (+2.1%) to 4,692 and the S&P 500 jumped 36 points (+1.8%) to 2,036. The NYSE finished at +1.88% and the small cap Russell 2000 at +1.62%.

Overseas, the Asia-Pacific region turned in another mixed performance. Japan’s Nikkei 225 Index crept up by 0.1 percent, while Hong Kong’s Hang Seng Index edged down by 0.3 percent. China’s Shanghai Index was up by 0.6 percent.

Meanwhile, the major European markets all moved sharply higher on the day. While the German DAX Index surged up by 1.9 percent, the U.K.’s FTSE 100 Index and the French CAC 40 Index both soared by 2.6 percent.

The media explanation of today’s bounce on Wall Street was that traders were motivated to pick up “discounted” stock positions as bargains. I say most of this bounce was simply computerized buying as stocks across the board had broken down below the 50 and 200-day moving averages, where many of these trading programs have been tweaked to automatically buy.

Traders and fund managers who were caught unawares of the Brexit Sell-Off will watch this bounce carefully. If it starts to weaken in the next day or so then they will jump on the opportunity to book their losses at a smaller level, leading to another volatile selling spree.

Volatility is the winner following the Brexit vote. But this is a type of volatility that is hard to predict on a day to day basis. We remain convinced that going forward this summer in particular, we will see dramatic sell-offs and dramatic rallies as the overall markets continue to decline in a jagged path downward.

Government View Of Economy Improves

The Commerce Department released a revised GDP report today showing that economic activity increased faster than they previously estimated for the first quarter of 2016.

The Commerce Department said the pace of growth in gross domestic product was upwardly revised to 1.1 percent from the previous estimate of 0.8 percent. The revised GDP growth in the first quarter compares to the 1.4 percent growth reported in the fourth quarter and the 1.0 percent increase expected by economists for the first quarter of 2016.

A separate report from the Conference Board showed a much bigger than expected improvement in consumer confidence in the month of June. The Conference Board said its consumer confidence index jumped to 98.0 in June from a revised 92.4 in May. Economists had been expecting the index to inch up to 93.3.

Bear in mind that these economic reports were both from the government today. We will need to wait for private reports to see if there is a positive or negative correlation to the government data.

Bounce is Testing 200MA

While the Brexit movement has spurred chaos for the European Union, with many other countries wanting a similar referendum, liquidity infusion via central banks and their dealer banks has managed to develop some support at the broad 200-day moving averages for all the major indexes.

I have drawn a wedge pattern for the S&P 500, including the break down through the 50 and 200MA support levels since the Brexit sell-off started. I have also added a technical tool called the Fibonacci retracement, showing that the first retracement level was reached near the 200-day moving average:

Notice the nominal bounce today and how prices moved just above the red 200-day moving average. Also take note that the S&P 500 prices fell just below the 38.2 percent Fibonacci retracement level ahead of this bounce.

The 200MA and the Fibonacci retracement levels are technical measures that often are programmed into buying programs on automated management computers for larger fund management organizations and for trading desks at large dealer banks.

The bounce may continue for another day or two, but given the large sell-off there will be traders as well as a few more sensitive trading systems that will try to take advantage of the bounce and sell into the somewhat small bounce rally. And such selling will result in another strong leg down, likely to the 50% Fibonacci retracement level if not further.

All the major concerns for confidence in financial markets globally and especially in the EU and for the euro currency still remain. Nothing has been done to quell the disruption that Brexit initiated last Friday. The fragile financial conditions of the EU and the ECB banks are only going to become more and more exacerbated as EU countries attempt to hold their own exit referendums to quell their citizenry concerns. Some of these EU banks have lost almost 50% of their share value already. That can’t be cured with a simple market bounce.

The EU has a big problem on its hand and interesting proposals are being thrown out to take sovereign control away from the remaining EU countries rather than allow them their own referendum for exit. The EU leaders want to create a single sovereign EU rather than allow individual country sovereignty. This will not end well and will force drastic steps in the Eurozone that will only create greater uncertainty – all in an attempt to salvage the EU globalization “experiment.”