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Short covering lifts averages from their lows

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A little short covering rally has edged the major market averages back into the green as the final hour of trading approaches. While we often here various TV commentators mention a short- covering rally, some rally's are perhaps also bolstered by more than just short covering.

What makes me think that current action is pure short covering is that the 10-year YIELD ($TNX.X) may have experience a near-term technical correction of its own. Being a closely monitored indicator for both near and longer-term cash flow and rotation, the "filling" of a gap created from yesterday's close to this morning's low has found some bears locking in gains on a near- term basis.

This is something I alluded to in today's market monitor at 11:26:22 when correlating the 10-year YIELD against a short-term bearish trade in Microsoft (MSFT).

10-year YIELD Chart - 60-minute interval

The last 90-minutes of trading since our 01:00 Update hints that the action in the 10-year YIELD is most likely technically driven and the YIELD on the 10-year has filled its gap from earlier this morning. However, this did spark a bit of a recovery in stocks as some short-term bears were most likely monitoring things here.

I'm not any different and at 01:28:26, thought a "day trader" in my previously profiled bearish trade in Microsoft (NASDAQ:MSFT) should lock in small gains at $49.90 as the 10-year YIELD edged above 5.0% YIELD.

Microsoft Chart - 60-minute interval

MSFT was trading just below the $50 level at $49.90 when the 10- year YIELD began moving above the 5.0% level. I thought that might have a "day trader" that was short MSFT from earlier in the day at $50.27 taking a small gain off the table.

Swing-traders on the other hand that are sticking with the originally profiled stop of $52.50 will be using the trending lower 50 and 200-pd moving averages as their stops, while targeting the $47 level.

While this is a near-term look at the relationship between MSFT and the 10-year YIELD, I do think that traders and investors can carry it forward to their swing trading and investing.

One other reason I think we've seen a short covering rally near- term is that the "stronger" sectors like the Dow Jones Transportation (TRAN) 2,656 -1.25% and Cyclical Index (CYC.X) 560 -1.27% did rebound a bit from their lows, but not nearly as much as some of the tech sectors. For the most part, institutional shorts have been preying on the weaker technology sectors and not the stronger transports or cyclicals. Thus my feeling based on observation that the current little rally is simply short covering and most likely will be short-lived.

Jeff Bailey
Senior Market Technician
Option Investor

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