The squeeze is on

By Jani Ziedins | Intraday Analysis

Nov 20

S&P500 daily at end of day

Don’t listen to bears claiming the low volume invalidates today’s move, selling has dried up and bears are powerless right now.

MARKET BEHAVIOR

Volatility cuts both ways as shorts got blown out of the water.  A lot of bears are pointing to the low volume today, but in the markets we win and lose on of price, not volume.  In reality, all the low volume demonstrates is selling dried up like the Sahara Desert and there was nowhere to go but up, and by up I mean shoot up like a rocket.  I’ve been talking about this for a few days, so hopefully it didn’t catch anyone by surprise.

MARKET SENTIMENT

Bears got a little too cocky last week and that lead to their barbecuing today.  Some people think you need to chase off all the bulls before a market can reverse, but that is wrong.  No matter how bad things get, you will always have willing buyers.  If you don’t, the free market lowers prices until willing buyers can’t resist.  This principle is the core of free markets and supply and demand.  The market price is always the balance point between bulls and bears.  If supply or demand skews one way or the other, the market price automatically moves to regain balance between the two sides.

But if we can’t look at numbers of bears versus bulls, what do we use to identify potential reversals?  It’s not numbers that signal tops or bottoms, but the attitude of each side that we are looking for.  Arrogance, cockiness, timidness, and uncertainty are signs of an imminent reversal.  Last week bears were patting themselves on the back for their savviness and insight.  I bet they are not feeling so smart today.

Today’s low volume signals bulls are still timid and bears are rationalizing the bounce trying to play down the significance.  That means there is still fuel in the tank for additional price gains.  It could be tomorrow or a few days from now, but the market is primed to go higher and all it takes is a minor positive news story to make the market jump.

TRADING OPPORTUNITIES

Stating the obvious here, but today was a great day to be long as this was the biggest up-day in almost three months.  And little surprise it came on the heels of a sharp and emotional selloff.  Don’t be afraid of the light volume, that just shows other people are watching this from the sidelines and all those on the outside are potential buyers who will keep pushing this thing higher if they start chasing.

Hopefully everyone took my advice and either avoided shorting this market, or took their shorts off last week.  There is still some upside left in this move, but expect volatility as the market works through this reversal.  This is setting up nicely for swing trading; buy the dips and sell the rallies.  The market needs to trade sideways for a bit and chew up bears and bulls alike before a directional breakout will stick.

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.