Is There a Power Squeeze Pending?
Financial markets have been pounded to near oblivion in the past eight weeks. According to the news media all around us, there is no bottom in sight. Savvy traders should expect otherwise, and those of us who’ve been around awhile have seen this numerous times before.
The S&P 500 has shed more than 400 index points in the past four calendar weeks. That would be several stages beyond extreme, by any relative measure. Yes the fundamentals support a big drop and perhaps there are lower-lows to come before a permanent bottom is in place. But we aren’t nine sessions away from the S&P going to zero and filing bankruptcy. Somewhere ahead of us real soon, there is a massive dead-cat bounce waiting to explode.
Classic setups for a monumental squeeze are in place right now. Several consecutive sessions straight into a hole have markets grossly oversold on a short term basis. That has nothing to do with where markets might be weeks or months from now on a fundamental basis. Right now at this moment in time, indexes are stretched to an extreme on the downside.
Retailers Wrong At The Turns
Human nature has a majority of investors and traders buying at the tops and selling at the bottoms. That endless pattern has never failed and it never will… until the laws of basic human nature are repealed. Massive redemption and outright dumping of stocks is rampant now. The VIX is again at nosebleed levels. All technical signs point to a near term bottom at hand.
But that’s not what retail traders are feeling inside. They have been punished if not decimated on the long side. They are tired of watching markets crush lower, and finally feel a sense of hopelessness that anyone will ever buy anything again. The entire system is on verge of collapse, world indexes will cease to exist, load up the bunkers with ammunition and non-perishable goods.
That is just about when the big-money players, those with money left are looking to buy. When the buying starts, an accordion-like wave of shorts up the scale will torch out. I expect we will see at least one session where the Dow rallies +1,000 index points and the S&P 500 rallies more than +100 index points between the cash-market bells.
Most retail traders are now on the permabear bandwagon. Too late for that… time to climb aboard that train was weeks ago. There is a near-term bottom lurking here, which will eat up persistent shorts for days on end when it catches fire. A deep selloff with emphasis today could easily spark short covering into the long weekend ahead. If they sell hard today and/or sell deeper through the futures session while U.S. markets are closed on Monday, the next session to come on Tuesday could be a market bonfire.
I’m not calling a bottom here… I’m simply warning that there is a bottom around the near corner, soon. When the inevitable power turn ignites, please do not short each pop pullback with expectations that it will work. That will fail. Blow the dust off your dip-buying skills instead… that’s where the easy money soon will be.
Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets