Wednesday, January 07, 2015

Why Today's Rally Is Nothing More Then A Short Squeeze

After suffering four to six straight distribution days, slicing through their fifty day moving averages in above average volume, and getting a bit over extended, the Nasdaq, SP 500, and DOW, naturally needed to consolidate their losses. Heading into the close, all three indices were trading up over one percent, but volume has been drying up as the day has progressed.

The VIX spiked over fifty percent during the sell off and continued its pattern of higher lows even as the market made new highs. A clear sign that while the markets were luring traders into complacency, anxiety has been slowly rising, and spiking with every pulback, despite the markets ability to make new highs, quickly, after every pullback.

The short trading ideas list is littered with strong downside follow through and new setups tightening as the market squeezes. Nimble traders who started shorting as short setups started to rollover last Friday and over the last two days, are sitting on comfortable profits even after today's short squeeze. It is hard to find a single short setups from Friday or Monday that has fallen apart or is currently threatening to fall apart. The majority are tightening to resume their downtrends once market selling pressure resumes.

Activision Blizzard (ATVI), Terex (TEX), and Priceline (PCLN) continue to follow through to the downisde, while stocks like Advance Micro Devices (AMD), Waddell & Reed (WDR), and Mattel (MAT), are holding tight near their respective fifty day moving averages ready to rollover.

Leading growth stocks continue to behave poorly. There are almost no long term setups, and the few short term setups that were available can't follow through and are stalling even as the market pushes higher during the day. Outside of a few stocks that could run into earnings, the long side needs to be avoided until there is at least some evidence that leading growth stocks are resisting downside market pressure and nearing breakouts on reversal days. None of this is happening in today's short squeeze.

Apple (AAPL), Baidu (BIDU), and Ali Baba (BABA), held up strongly yesterday and attempted to follow through at the open along with the market. But as the day has progressed, all three stocks have started to stall, even as the market continues to push into new intra-day highs.

Without any solid longer term setups, poor follow through by shorter term setups, weak volume on today's rally attempt, and short positions holding recent gains, the probability of a sustained rally is almost zero. The indices may continue to squeeze to their short term, ten and twenty day moving averages, but be on alert for stalling action as they do.

Traders should use any rally attempt to initiate new short positions or add on to existing short positions. Any long positions that might remain in a traders portfolio that is not reacting to today's rally attempt, should be sold.
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