Big gains in the market after employment numbers smashed expectations. This blew all the bears and swing traders out of the water and this run up was due in part to a huge short squeeze. When too many market participants are on one side of the market, this sets up an explosive move in the opposite direction. And that is exactly what we’ve seen over the last month and a half as all the biggest moves have been to the upside.
This explosive upside behavior is a departure from the way the market traditionally acts where downside moves are bigger. But while this recent pattern is contradictory to market convention, the sentiment causing these large pops is exactly the same.
Large moves are almost always driven by fear of loss. Most often we see this to the downside, but over the last month the upside moves have been most dramatic because the large short interest. This sets up for a short squeeze where bears are sent rushing for the exits when the market moves against them. To close out their short positions, bears must buy stock, adding fuel to the rally. And as of recent, these powerful short squeezes show just how bearish this market is.
The market made another new high without the market falling to the low of the trading range, showing we are moving out of this channel. So far this move seems to be breaking out to the upside. Now the challenge will be to figure out what the next pattern will be while there is still lots of time to trade it. A bull rally into the election would be nice, fingers crossed.
Today’s strength furthers the case for a bull rally. It won’t be an easy buy because they never are, but hopefully we’re transitioning past the 40 point swings we’ve been living with all summer. Find the best growth stocks and stick to your trading plan. Buying right is what will keep you from getting shaken out and if we the market continues to find support, we can start holding for larger gains instead of selling for quick profits like what was required over the summer.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.