NASDAQ poised for a short squeeze

Traders succeeded at testing the durability of the NASDAQ advance on Thursday, setting up a moderately deep dip at the open which was an invitation for a selloff, but nobody took the bait, and instead we saw significant dip buying, which is a good sign that there is still significant bullishness out there. NASDAQ even managed to reclaim the psychological 4700 level (okay, just barely, by a mere two points.) Today, traders will do the opposite and test how much interest there is in a new "leg" for the advance. Futures are up sharply, indicating a big pop at the open, but as usual the big question is whether speculators follow suite and pile on to extend those gains or reverse their bias and sell into the rally.

 

The big pop at the open could trigger a round of short covering by bearish speculators who were betting too heavily that the advance was over. That's also known as a "short squeeze" as bears are "stopped" out of their short positions to avoid further losses. The bad news is that stopped-out bears will then be sitting on the sidelines with their cash, impatiently waiting for the advance to run out of momentum again, when they will pounce again with renewed and increased vigor. Meanwhile neutral speculators may simple revise their bias to more of a "risk on" position as the advance "shows legs", and fueling an even stronger advance, but it is unknown how many of these people are really out there.

 

It's a Friday again, so a fair number of short-term speculators will tend to close out positions ahead of the weekend, not to mention ahead of a shortened holiday week, when anything can happen. Whether these folks have net long or net short positions to close is unknown but will determine whether they will be selling or buying today.

 

Personally, I will continue to incrementally and selectively be harvesting a small portion of my gains to raise my reserve cash levels for the inevitable rainy days and future dip purchases. Right now I am still a bit over-invested, including some dip purchases made on margin.

 

-- Jack Krupansky