Investors were caught by surprise when market breadth turned against them. I wrote yesterday about the 2:1 A/D line in favor if decliners on the S&P. Breadth had been negative all week with only a few big caps leading the market higher. Today, that breadth reversed to 2:1 in favor of advancers on the S&P and 4:1 in favor of advancers in the small caps. Nasdaq stocks were 3:2 in favor of advancers but the Nasdaq big caps were almost all strongly positive and that lifted the market.
When breadth reverses suddenly there is only one reason and that is short covering. There is no bell that rings in a down market as a signal for everyone to rush into the market. A few headlines appear and some nervous Nellies begin to cover their shorts and it sets off a wave of short covering. Futures are down again tonight so it will be interesting to see if this short squeeze is a one-day wonder.
New positions are only added on Wednesday and Saturday except in special circumstances.
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