Short-squeeze continues

By Jani Ziedins | Intraday Analysis

Oct 17

S&P500 daily at end of day

Markets continued the 50dma bounce for the third day, but how much longer can this keep up?  Where are the new chasers going to come from?  Bears are demoralized and bulls are breathing a sigh of relief.  The market’s picked on bulls for long enough, it might be time to make the bulls sweat some.

MARKET BEHAVIOR

Stocks rallied nicely for the 3rd consecutive day, pushing the S&P500 to 1460.  The chart looks like a double-bottom, bouncing off of the 50dma three days ago.  But what makes double-bottoms work is the demoralizing second down-leg that undercuts the previous selloff.  This second low shakes out the last of the weak holders and clears the way for the rebound.  I’m not sure last week’s low reached that sentiment capitulation point.  Another thing is robust double-bottoms take a bit longer to form.  The speed of the three days is more of a short-squeeze than a solid foundation.

MARKET SENTIMENT

What we need to do is evaluate is how other traders are responding to this market.  Obviously bears are getting their butt kicked for the umpteenth time and morale and resolve on that side of the fence is hitting a new low.  In the bull camp, people who sat through the pullback are breathing a sigh of relieve as their decision to hold the dip paid off.

If we look at who was buying this recent rebound, it was a lot of bears getting squeezed and forced to buy back their shorts for a loss.  We also have swing and momentum traders jumping on the bandwagon.  But what about big-money value buyers?  Are they a playing a role in this 30-point rally?  On that I’d have to say no.  Value buyers are in the more cautious and deliberate crowd on Wall Street.  Sharply rising prices makes them step-back, not chase with reckless abandon.

So what insight does this give us?  Shorts and swing-traders are climbing over each other to buy this market, but they represent a small sliver of traders and their buying will taper off quickly.  Value investors are taking a step back after the jump in prices and their buying won’t be there to continue the surge higher.  And finally, weak bulls are still hanging on because we didn’t get a high-volume selloff on the second dip.  It seems to me we are close to running out of buyers and could find some weakness over the next couple days.  If buying completely dries up, then we could even retest the 50dma and finally get that high-volume capitulation bottom that makes a sustainable move higher possible.

The markets are always about supply and demand.  For the market to continue this surge higher, we need to find new buyers.  I have a hard time figuring out who that next buyer will be to keep this rebound racing ahead.

TRADING OPPORTUNITIES

My long-term view continues to be bullish, but we could see weakness in the near-term.  We’ll probably settle into a trading range or slightly decline leading into the election, but finish the year with a rally.  As bad as the headlines seem, it the markets are closing in on a 20% year.  It is hard to do better than that.  But what made it possible was all the negativity.  When everyone is pleased with the market outlook, the only place to go is down.  So here is hoping everyone continues their pessimism next year too.

AAPL daily at end of day

INDIVIDUAL STOCKS

AAPL continues living under its 50dma.  Tuesday had a nice pop, but this stock has too many blind followers to let is decline without a fight.  This is the stock everyone wishes they bought at $200, $300, $400, $500, and $600.  As a result, investors will pile in on every pullback.  That will keep any decline gradual because there is always bid under the market.  I’m a big fan of Apple products, but the stock might need a cooling off period following such a tremendous run.   Rather than keeping it as a core holding, it might make for a better trading stock going forward.  Buy the dips and sell the rips.  It would be a shame for anyone who made a great profit on this stock to let is slowly slip away.

Stay safe

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About the Author

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.