Recent Failed Sell Signals and Short Squeezes in the SPY
by Chart School - October 12th, 2009 4:39 pm
Recent Failed Sell Signals and Short Squeezes in the SPY
Courtesy of Corey at Afraid to Trade
I wanted to give an updated look at the recent post entitled “If History Repeats, Will it Mean New High for S&P 500?“ As we see today, the answer is overwhelmingly “yes” as I suspected would be the case when I wrote that post on October 6th.
Let’s take an updated look now that ‘history has indeed repeated’ and also step inside the three most recent “short squeezes” on the SPY and S&P 500.
Starting with an updated look at the SPY Daily chart:
In the prior post, I mentioned that the pattern looked eerily similar to the prior “surprise” rallies that were fueled in part by short-covering (buying pressure to exit positions with losses). The yellow highlighted regions reflect the “short squeeze” while the red regions represent valid and classic short-sale signals (be they from momentum or volume divergences, and/or breaking beneath the 20 day EMA).
These ‘failed sell signals’ started with the July ‘breaking’ of the widely publicized Head and Shoulders pattern which led to a massive short-squeeze (so many people were 100% convinced the market was going to break to new lows from this pattern).
From there, buyers have invalidated (or busted/broken) three additional short-sell (swing trade) signals, resulting in snap rallies to break to new 2009 highs each time.
Let’s step inside the highlighted zones above and see them on a plain 60min chart:
(Click for Full-Size Image)
Not only were there valid divergences, but there were large downside (morning) gaps and strong selling days that preceded the reversals to the upside, which tells us that shorts were entering positions, and as the market -for whatever reason – began to reverse, an “avalanche” occurred as prices rose, which triggered out stop-losses and drew in fresh buyers.
Notice the swift upside gaps and strong up bars in each of the highlighted regions, especially the current region which began on October 5th.
What is the implication?
As I mentioned in the previous post, odds strongly favored a retest or breaking of the 2009 high which occurred today (a re-test). Should price continue to nudge slightly higher beyond $108.03 in the SPY and 1,081 in the S&P 500, then we will see more short-sellers be stopped out which will create further upside ‘bursts.’
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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