Tech Reverses Off Resistance; Bull Traps for Semiconductors and Russell 2000

After two short plays were cut from under Large Cap traders it's now the turn of Small Caps and Tech indices to take a second bite of the cherry. In the case of Tech indices, there is resistance to work with too.

The Russell 2000 finished the day with a 'bull trap', reversing Friday's breakout. This is a fresh shorting opportunity with a stop above 1,487. Technicals are bullish so there is no suggestive weakness which may guide to further downside so keep stops tight.  The last stop was whipped out so without clear resistance there is a chance this could follow with another whipsaw signal.

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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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