Option Investor
Index Wrap

New Ground

Printer friendly version
New Ground
Austin Passamonte

No one really knows what sparked today's historical short squeeze rally this morning instead of Tuesday 2:20pm EST. Some say traders needed to see the CPI report but that seems lame to me. After the Fed emphatically stated they would keep slicing rates until borrowing is free, what secrets could the CPI possibly hold? I don't buy that at all.

And the markets failure to rally on bullish news Tuesday was in itself fundamentally bearish, as any trader who argued that the new rally will live because it failed to sell off on recent bad news was then bullish. Same parameters apply, right?

So what is the answer?

I still believe what Molly Evans first pointed out here in one of her Market Wraps several weeks ago: new traders are playing the short side and likewise toying with fire. Without question a vast number of traders began going short yesterday and got more aggressive this morning. Once the market held up and failed to easily die the weakest hands began to bail & cover, which created the chain reaction inferno we saw today.

That's how short-squeeze rallies emerge from nowhere with powerful force. It's not buying action that causes the squeeze, it's a lack of further selling that shakes out the weakest link, who breaks down next until the staunchest of bears cannot take the pain any longer. Then the buying ensues once momentum traders confirm this pattern is in effect.

Proof positive is the lackluster volume over most of the session on all indices until late in the day. That shows a lack of actual buying until the party is past its peak. Anyone who doubts that need only monitor the early put/call ratio or VIX to see which side the morning volume was on, which was clearly to the downside.

Once again I spent hours last night pouring over charts of every size, shape & kind to game the best odds for Wednesday market action. I didn't give a ding-dang which way the market wanted to go: just get me and this website on the right side of it for heaven's sake! All that effort led me to believe there was more likelihood of downside action rather than upside movement.

Daily, hourly and thirty-minute oscillators all pointed straight down into 10:00am Wednesday morning. We can see that for ourselves in tonight's "Swing 101" article. All I'm trying to do is figure out which way the market wants to go and get with it. Those chart signals didn't lie... we did have weak markets. The short-squeeze rally that ensued isn't so much market strength as lack of weakness and there is a difference in the underlying measurement oscillators quantify their bias with.

Once the markets turned and burst to the upside, where are the entry points for a website trading model resigned to using pre- scheduled trades by SEC law? I have no possible way of planning viable call plays based on technical setups projected ahead of time. Once the pivot began, where does anyone but veteran day traders jump in from there? Without benefit of hindsight, who really thought the Dow would run over 400 points from the lows today?

Sure, we all know what should have been done after the fact and rest assured plenty of learned day traders did exactly that. They were prepared to bail on a moment's notice should range bound action have continued, as for all we knew at the time it would. But the markets ran away, we were locked out of a parabolic move with no pullback in sight and the session is over and done with.

I've never seen so many false sell signals in my entire life and that includes early 1999 as well. Then again, I've never lived through a period where the Fed slashes interest rates five times in four months for a total of 2.50 points, either. I've never witnessed so many short-squeeze rallies in one small stretch of time. I've never seen the Dow add 2,200 index points in less than six weeks with most of those gains coming from huge gap-up moves and short-squeeze rallies. Never in my career.

And you know what? Neither has anyone else. These times are truly unprecedented in the history of market existence.

No need to look at short-term charts... they are all buried in overbought and no use to us right now. Let's view a bigger picture instead. You decide for yourself where we likely go from here:

(Weekly/Daily Charts: Dow)

The Dow's weekly chart (left) shows stochastic values both in overbought extremes already. Could stay pinned up there for a long time to come but in hindsight we see the proper entry came from oversold extreme until now. Should we make the possible mistake of going long from here, or are 2,200 index points from the bottom asking too much for continuation? Your call on this one.

(Weekly/Daily Charts: NDX)

Here's one that bulls may like better: the NDX has been forming a bull flag pattern in the weekly chart since last year. It has a 35-point span from high corner to low, and a break above 47 (more apt above 50) would tack on 35 points to a long-term bullish target objective from there.

A bullish pennant in the daily chart suggests the 56 area could be our next high target for now. Stochastic action is making a bullish reversal and looks good from here. SOX chart is leading this action and looks very similar, by the way.

(Weekly/Daily Charts: SPX)

The SPX has been consolidating within a bull flag descending channel since last summer on the weekly chart and may have successfully broken above that today.

Or is it trapped within a near-term bearish wedge (lavender) that confirms the bear flag daily chart pattern? Only time will tell and you be the judge on whether to go long here or wait.

(Weekly/Daily Charts: CYC)

Reams of email asked about the Morgan Stanley Cyclical Index today. Let me guess: my very good friend Jeff Bailey is long this one? No fair... I read his intraday updates as well. I haven't peeked at what he & Canavan did today but chances are they bought everything that moved. Let me mention to the new visitors with us that their website is included with your IS subscription and your username & password works for both: www.PremierMarkets.com

The CYC.X has options but is very illiquid. The iShares are a very tradable vehicle and covered calls are possible between them and the CYC options when value ratios are matched evenly as well. The failed bearish pennant on the daily chart is very bullish and there may be room to run in the weekly if its monitored closely near the top of that ascending bearish channel.

Up Or Down?
A little of both. Here's an easy exercise we can all learn something from: dial up a daily chart for your favorite index and pick out all the long, white candles you see for sessions like this. In most cases, what happens soon after? That's right, lower prices emerge before the next leg up resumes. Maybe we will rally straight to the sky from here but my money is betting a retest of 11,000 on the Dow happens within the next few sessions and offers the entrance I'm looking for instead.

As for the remaining two days, I'm merely following 60/30-minute chart stochastic signals and entering on 10/5-minute stochastic signals for Swing/Day Trades. Let the dust settle after this weekend and we'll see what long-term action looks like beyond expiration week. I hope & pray my all-time favorite option trading method has returned. That would be buying calls on Monday, selling them on Thursday for massive gains and taking a three-day weekend every week. Now that's MY kind of trading!

Best Trading Wishes,

Index Wrap Archives