Well Hello There!

Bullish activity tends to follow a common path. The path includes bursts higher followed by healthy retracements to reset and consolidate gains. It is during these retracements where antsy bulls jump ship and patient longs build inventory. The pattern repeats itself until a crescendo is reached whereby fear of missing out overwhelms fear of loss at which time it is better to exit stage left then wait for the next retracement which is sure to turn into a full blown correction. It makes no difference your time frame; this basic premise is fractal and thereby can be applied to intra-day, daily, weekly or even monthly charts if you desire.

From a longer term perspective, yesterday’s bounce did little to change my outlook. The S&P is still below its ‘squiggly line’ as one trader jokingly calls it to make fun of my 50 period moving average rule, in addition to the countless stocks which have put in broadening longer term tops. The longer term future from this time period looks ominous to me and my goal is to approach any other shorter time period with this in mind.

From a shorter term perspective however, yesterday’s action was a change in character. Actually, let me be more clear that Monday’s action, the overnight session and Tuesday’s follow through was a change in character. You see, since the 14^th the market has been bouncing along support looking as if a follow through was inevitable. Traders licked their lips in anticipation of this drop and cued up shorts looking to profit from the inevitable crash. With an hour or so to go in trading on Monday it came and they pounced. The towel trade was fast and furious and took out some key levels. Unfortunately however, it didn’t stick and the overnight session produced a bounce right back to the scene of the crime. “Oh who cares about the overnight session” I am certain was thought by most new shorts however this was only the appetizer for what became a full-blown full course meal of short squeeze sensation. The market trended all day on Tuesday and more than likely was enough of a run to bring in even more shorts and make new shorts think to themselves ‘there is no way I’m covering in this, its nothing but garbage.’

So here we are, day two of what I will call the failed breakdown and we have a text book retracement thus far. The market is consolidating yesterday’s move and lulling shorts into the false sense of security that holding yesterday through the pain was a good idea. New shorts at day end are being rewarded and will certainly become convinced they are on the right side.

From my vantage point this sets the stage for a pretty decent short squeeze higher however against the longer term backdrop of pain and destruction. I will look to play it with an eye on Monday’s previous break-down level as well as with the basic premise to sell and exit stage left when the fear of losing is replaced with the fear of missing out. Enter the Santa Claus Rally!