Generals Short Squeeze, Part 2

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

In the previous commentary last Thursday, (The Generals Short Squeeze Opportunity) I said that the key price zone was 923-950, with the 200DEMA at 945, and that the QQQQ had closed above its 200DEMA the previous two days. I also said that various ETF's like the OIH, XLE, and XLB were in significant consolidations at their 200DEMA's, and that the SPX has been correcting sideways for 17 days, which had worked off the ST-O/B momentum condition. It was noted that most professionals were expecting a short term correction, and that the market was set up for a mini short squeeze by the Generals into month end, and the first few days of June.

The SPX went +1.5 and +1.9 the last two days in the month, +3.6 for the week, and +5.3 for the month of April. This little tactical squeeze kept the SPX positive on a YTD basis at +1.8, so the Generals are to be congratulated on a job well done, but not complete.

 The squeeze was in play yesterday as the SPX went out +2.6 to 942.87, with an intraday high of 947.77, on relatively light NYSE volume of 1.5 bill shs. The previous significant high is 943.85 on 1/6/09, which preceded the 41 day leg down to the 667 low on 3/6/09, while the 200DEMA is now 943.83 However, other major indexes like the NYA, COMPX, IWM, and MDY all broke out of their current trading ranges, and also closed above their 200DEMA's, joining the QQQQ which has been the leader. This means that traders are now looking at new higher support levels to play with, because don't forget folks, "the market is a game". Also, tomorrow and Thursday are Fib and Gann time counts (+/- 2 days) and so is 6/8 so a reversal should be no surprise, especially after the mini squeeze.

I said the technicals were in place for a mini short squeeze, but you have to take into consideration that the SPX is extremely extended in price relative to time in that the SPX is +42% in just 59 days, and there has been no Wave 2 correction, so unless you think it is a "V" bottom, which I don't, then traders that bought this market right (trading service), should be taking money off the table, and tightening stops on the balance.

Our primary focus in the trading service has been energy, materials, technology, and selected industrial stocks, but they have been the leaders and are obviously extremely extended. For example, the USO was a swing trade buy in the trading service when it made a 123 HB, which is evident on the 4/27/09 chart, but now it is extended to its upper channel line so partial profits are being taken, stops tightened, but no new position buying at these levels for short term traders until there is another significant pullback. However, day traders will continue to prosper from the intraday volatility regardless of the extended levels.

The decline in the $U.S. dollar has given strength to the commodity sectors, which are now a significant weighting in the SPX, so any reversal in the dollar could accelerate the next significant decline in the major indexes. The market is discounting a normal business cycle rebound, but this was the Derivative Meltdown of all time, and the economic bounce will be extremely weaker than the stock market is indicating. There are significant write downs yet to come, and the current and future insolvency of many financial institutions is being hidden by much of the Fed action and gimmick accounting.

Imagine this, the Government is now managing the auto industry, and much of the financial industry through bank nationalization, including AIG, which is essentially insolvent, and will take down many other financial institutions as it unfolds. If the Government's track record at Amtrak and the U.S. Postal Service is any indication then put your helmets folks, but don't buy in position anything that the Government is involved in.

Have a good trading day!

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