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August 27, 2009

Squeeze A'Comin'

Once again, the bullish resilience of this market has bears licking their wounds. As with last Monday's drop, weakness was immediately bought, erasing whatever brief gains the bears were enjoying. At least last week the market gods gave bears a night of peace before tying them to the whipping post. Still, last week's decline took a consolidative form and came on weak volume, so at least there were warning signs. Today's action was simply insidious:

s&p 500 intraday chart

This repeated behavior of quickly reversing breakdowns tells me that too many people are chasing each drop with shorts and/or there are so many painfully underwater short positions out there that each time stocks retreat, a subset of this group runs for cover, thereby forcing prices back up. If so, there is only one way this rally can end... with a tidal wave of shorts crying uncle. If we see a 3%+ rally session on huge volume in the near future, know that you are witnessing this epic squeeze and be prepared to fade it. The massive $333M of selling-on-strength seen in the spyders may give us a clue that the squeeze is imminent. (The figure was actually $485M SoS after 4:00, but was revised downward after 5:00. If anyone knows why, I'm all ears.) Besides, it would be quite appropriate for the counter-trend rally to the stock market's biggest ever panic sell to end with a huge panic buy.

banking stock index

The rally in banking shares seems to be stalling. Should we see a short squeeze, this index could develop a false break much as it is prone to do (see circles), which would constitute an epic head fake. At the risk of thinking too many steps ahead, a trader could wait for the BKX to conquer and then fail this pivot before chasing the short side, as such behavior would provide an excellent confirmation of a change in tone.

Let's not compeltely rule out the possibility that the Fed has printed enough money to send the indexes back to nominal highs. However, even if such a travesty were to occur, stocks are not going to go there in a straight line. We will have to see a correction nasty enough to knock bulls off the easy ride.

Nothing special is happening in precious metals at the moment. Gold is doing its best to make it to the vertex of its triangle before offering traders a break. GDX, however, hammered of the lower bound of its own triangle, so maybe some follow-thru will give the market some leadership.

gold mining stocks

Oil also posted a reversal today:

oil price chart

See you this weekend...

 

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