Monday, July 14, 2014

NASDAQ poised to jump

NASDAQ had a semi-decent bounce on Friday after the steeper declines earlier in the week, but it is still almost 2% below the recent short-term peak at the close of the previous week. Futures are up this morning, but that may be more of a trader-engineered short squeeze. Some short-term bearish speculators may have been the force behind the bounce on Friday, with buying to cover their short positions ahead of the weekend when anything can happen, but not all short-term speculators do that weekend closeout trade, so the swoon of NASDAQ last week might have left a lot of the short-term bearish speculators too short in a volatile market, and now the upwards pressure of traders could force them to cover their short positions, which is known as a short squeeze.
 
The gains on a short squeeze can be impressive, but aren't typically very sustainable.
 
So, the thing to watch is not how high the market pops on the open, but the pattern of buying throughout the day – is there selling into each rally pop or does the market rise steadily throughout the day. I'd be happier with a modest to moderate 20-point gain, since anything like a 50-point gain or higher would suggest more of an unsustainable short squeeze that would be unlikely to unravel in the coming days or within a week.
 
This bounce could also be symptomatic of a little more "buy the rumor, sell the news" for technology stock quarterly reports that will start flowing in as the week progresses. What we will be looking for there is whether people buy on solid reports, or do the "sell the news" thing.
 
Short-term speculators may have decided that their "risk off" position of last week should now shift to "risk on" as positive Q2 quarterly reports are likely to be filling the media.
 
Or, short-term bearish speculators may have decided to let NASDAQ rise a bit more so that they can get more of a bite on some new short positions. Again, we'll know within a couple of days or a week or so, depending on whether NASDAQ hits a new near-term closing peak above the peak from the week before last.
 
For now, NASDAQ is is fairly decent shape. And the underlying U.S. economy continues to improve (albeit incrementally and with plenty of potholes and fits and starts), which is really the underlying foundation of any sustainable bull market.
 
-- Jack Krupansky

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