Short Squeezed Again; Rally Gains Momentum

Friday's second day of gains put another squeeze on shorts. Resistance was handily broken on higher volume accumulation leaving markets in an area of indecision with neither shorts nor longs holding a clear advantage. However, each advance strengthens the December swing low as a major low - opening up the next retest as a buying opportunity.

The S&P pulled away from congestion on net bullish technicals. Next upside target is the 200-day MA but the index is underperforming against the Russell 2000.

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Short Trades Limp Out

Yesterday's swing trade will have stopped out the aggressive short trades at the narrow doji, where the doji range was used as a stop. Shorts using the 50-day MA as a stop will still have a little room left to play with. Those looking for a new shorting opportunity may use today's doji as the entry trigger; shorting loss of doji low with stop on break of doji high (or a long trade on the reverse break).

The aforementioned trade looks clearest on the S&P where it edged above resistance but not enough to break beyond the 50-day MA; I have marked a second (short) entry signal but if it closes above the 50-day MA then the last chance saloon for these trades will be done.

It's a similar picture for the Dow Industrials

Somewhat ironically, the Semiconductors might have the best shorting play; we have a close near the low of the day after peaking last week. The index is above the 50-day MA but it's not looking like it will stay there much longer. There is an early 'sell' trigger in CCI along with a similar 'sell' trigger in relative performance.

The weakness in Semiconductors runs somewhat contrary to the more bullish action in the Nasdaq and Nasdaq 100. Both indices enjoyed a solid Tuesday, with the Nasdaq 100 closing with a small doji on its 50-day MA (a possible new shorting opportunity).

The Nasdaq managed to do a little better by closing above the 50-day MA although it finished with a doji too. The initial short will have been stopped out and today may offer another, although the Semiconductor Index or Nasdaq 100 are perhaps better opportunities in this regard.

The Russell 2000 edged over the 50-day MA but hasn't yet breached resistance. Some shorts will have covered today, other bulls will have bought today's advance. If we get past horizontal resistance then bulls might get another decent leg higher.

For tomorrow, shorts can keep at the S&P, Dow, Semiconductor Index and perhaps the Nasdaq 100. Longs may find the Russell 2000 more to their liking. Whipsaw continues to be the main risk. Investors can keep things cool until the next leg down.


You've now read my opinion, next read Douglas' blog.

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Investments are held in a pension fund on a buy-and-hold strategy.
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Swing trade breaks in Shorts favour but no follow through lower.

From a pure price perspective, the suggested swing trades broke to the downside, but the lack of follow-through beyond the opening hour doesn't suggest shorts are going to win here.  However, until last Thursday's/Friday's highs are breached the short plays can probably be held until they are decisively beaten. Ohers could look to a hedge with a long trade using a stop on a break of today's lows. With long/short covered the risk is whipsaw.

The Russell 2000 was the only index to finish with a lower close and if shorts are going to win out then this is likely to be the index to deliver.

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Has the bounce peaked?

Friday offered a day of tight trading on low volume. Swing traders can take advantage of this by trading a break of Friday's range (buy break of high/short loss of low) and setting a stop on the flip side of Thursday's range (of Friday's if you want to take on less risk). This set-up looks the most logical for the S&P.

The S&P again kept to resistance defined by the October spike low and now has the 50-day MA offering some additional resistance. Technicals have edged bullish except the Directional indicator which has been slowing since November; an indication of a possible switch to a trading range. Going forward, I would be looking for a shallow decline, perhaps to the 2,500s, before prices stabilize as a sideways range. Again, look to this a swing trade because if Monday starts brightly and can maintain that strength after the opening half hour it will stress existing shorts into covering their positions and open up for a move to the 200-day MA.

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