What a time to be on the road instead of at my trading desk! Friday's action gave us immediate confirmation that Thursday's ramp was nothing more than a short squeeze, and it did its job to perfection. Short sellers of all makes, including yours truly, were caught off-guard and knocked out of positions only to watch despondently as the market plunged Friday. We now turn our sites back to the 1325 level on the S&P 500. As mentioned in earlier posts, if the recent action proves to be nothing more than a tumultuous correction, this index should find support at that level. If, however, 1325 is decisively broken, look out below. Somehow, I don't think the market is going to let either side off the hook easily, so expect a test of 1325.
The other shocker in Friday's action was the $10.75 gain in the price of a barrel of oil. Never before had we even seen a $6 one-day gain, though we came close only the day before. It seems a lot of traders were leaning on the short side, perhaps believing the rhetoric out of Washington or believing that the parabolic run had ended at $135. Either way, the result was that these traders got caught with their pants down and were all rushing out of wrong-sided bets on Friday. I have little doubt we are witnessing the final burst of a blow-off move in oil. Price is quite extended by several measures, not to mention the fact that oil-related stocks did not confirm Friday's action... many service companies actually saw their share prices lower. At the same time, I would not go chasing any short plays on crude because parabolic runs can go from insane to maniacal. If you are itching to short oil, wait for the break, then short the first consolidation.
Well, I'm still trying to get caught up on my reading. I'll be back later with more comments and a few charts.