Short Squeeze Rally

An impressive short squeeze rally was triggered yesterday as panic over a potential trade suddenly seemed not so likely.  To protect themselves from additional losses traders that were holding short positions were forced to cover accelerating the rally and squeezing even more out as the day progressed.  A whipsaw of this magnitude clearly demonstrates just how quickly very emotional markets can shift direction.  With the Dow rallying 669 points and this morning futures pointing to a more than a 100 point gap up guard yourself from getting caught up in this quickly shifting drama.

The fear of missing out (FOMO) is a powerful emotion that often efficiently robs traders of their hard-earned capital so quickly it will leave your head spinning.  Focus on the price action of the and remember to hold onto your edge realizing that in just one day markets are now very close to overhead resistance in a bearish overall pattern.  Keep in mind huge intraday point swings are possible so if you trade make sure you have handle the risk.

On the Calendar

The Tuesday Economic Calendar kicks off at 8:55 AM with the Redbook report which is unlikely to move the markets.  At 9:00 AM the Case-Shiller is calling for continued strength in home prices with an adjusted monthly consensus of 0.7% gain and a year-on-year rate seen at 6.2%.   Consumer Confidence is out at 10:00 AM and consensus remains very strong expecting a 131.0 reading in March vs. February’s 130.8 print.  Also at 10:00 AM are two non-market moving reports the Richmond Fed Mfg. Index and the State Street Investor Confidence Index.  Other than that we have a Fed Speaker at 11: 00 AM as well as three bond auctions.

On the Earnings Calendar, I show 69 companies that are expected to report today.

Action Plan

With trade war fears suddenly diminishing yesterday’s market experienced a strong short squeeze forcing many traders to cover short positions to stop growing losses as the market rallied.  This morning Dow Futures are pointing to more than a 100 point gap up at the open as the bulls try to follow through with some buying pressure.  As good as it was to see such a nice relief bounce lets keep in mind that the indexes have significant overhead resistance and technical damage that it has yet to recover.  At the close yesterday, the Dow is more than 950 points below its 50-day average with the SP-500 over 80 points below.  Long story short, there is a lot of work to do even though both the Dow and SP-500 are displaying a possible double bottom pattern.

Be careful chasing morning gaps after such a big one-day-rally keeping in mind that short-term profit taking could occur at any time.  The VIX remains above its 50-day average so continue to expect large intraday price swings, head fakes, and nasty whipsaw price action where the swing trader edge is small, and the potential for risk is high.

Trade Wisely,

Doug