Wednesday, November 30, 2011

A lot of the pop will simply be short covering

Oh, yeah, and I forgot to mention the obvious (to me): A huge chunk of any initial pop at the stock market open will be short covering. Although Monday's gain may have frightened off a lot of the weaker shorts, adventurous traders and short-term speculators may be trying to engineer a "short squeeze" to force a lot of the harder-core shorts to throw in the towel and buy to close their short positions before they lose too much more money.
 
That said, it will remain unclear whether those guys will indeed flip their bias from "risk off" to "risk on" or simply wait a few minutes or hours (or days) for the pop to hit "buying exhaustion" and then re-open their short positions. Or, they may decide to "read the writing on the wall" and go "risk on" at least to ride the wave for a little while and then flip back to "risk off" after the current rally runs out of steam.
 
There really is a chance that we could be on an upswing of this trading range, but sometimes that can be an illusion.

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