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Short Squeeze

admin on 07 14, 2010

Hopefully everyone read the week ahead last week and agreed with me on the short squeeze that has driven this market.  I think Greenspan coined the term “irrational exuberence” and that is kind of how I feel at this point in the market.  There has been no positive news, a couple of earnings here and there that the media uses to play up the recovery, but they also hide the bad news.  Portugal debt was downgraded and that should will make it harder for Portugal to raise debt.  Should also through at least a flashlight on Europe, but media is portray Europe as “all good.”

What every trader should be looking at is the reality of the situation and playing what the market is giving you.  Long term …nothing has improved.  Short term…”holy short squeeze bat man.”

Here is a quick news snapshot from Yahoo this morning and I think this paints the picture pretty well as to what we are dealing with.  A lot of negative news and the media uses the headline to highlight the one positive that everyone wants to see.  Nobody likes negative news.

Some of the important drivers of the economy are in these articles.  They are talking about negative homes, negative banks, negative retailers,  and negative unemployment benefits.  Doesn’t look to pretty to me. The fact is that this move is a short squeeze there really is nothing to show for it.  The institutions and media are now pushing anything positive to hide the futures manipulation that they are doing in the wee hours of the morning on the thinnest of volume.  Even the ETF’s volume have dried up.  The main pivot point is the key resistance highs.  Does this squeeze have enough to turn into a full blown bullish reversal move?  Can the big players drive an the entire market without having one shred of positive news come out to support it?

Let’s take a look at some of the internals of the squeeze:

I took this image on Wednesday morning and with all of the headlines of the morning and such a bullish move yesterday we are only down slightly.  Volume has dried up as you can see at the bottom of the chart above.  INTC and AA started off earnings season, so this could be the start of a larger move.  As I said above critical point is the key resistance area will start at around 1121 to 1131.  As we have mentioned in past articles that in order to keep a move like this going there has to be some support.  For the traders that live in reality we would rather see a pullback and test of the 1070 area and build a base then take out the highs.  This would provide more confidence that the move is sustainable.

If we hit get up to resistance areas then traders really need to take some profits and reposition for the explosive moves in both directions.  VIX levels have retreated so that makes straight option purchases much more attractive.

If you have played the short squeeze as a bullish move, taking some profits after a 70% retracement is a good idea.  Setting a trailing stop to get out of that bullish position is also a good idea.  All it takes is one story to drop the bottom out of this thing.

To get the short squeeze, short term overbought scenario through to you, we have gone in the DJIA from $9,614 to $10,408 in six days.   It took us 10 days to drop from $10,594 to the $9,614.  The bearish side is normally the quicker side to drop.  In this case we have gotten 75% of the move with six days and a few days to push to the highs.

For those who are into the technicals, watch the futures overnight, the end of day market manipulation to the upside.  If either of these doesn’t appear then look for reversal.

If we do take out the highs with confidence (closing above the highs) then look for more bullishness to take hold.