Stocks Could Be In for a Short Squeeze
The past week and a half has been as choppy as it gets for the stock market. Thankfully, the herd mentality -- fear and greed -- stays the same. Understanding what others think and feel when involved in the market is one of the keys to making money consistently.
The crazy-looking chart, I will admit, is a little tough on the eyes. I should have used red and green for holiday colors but green just wasn't going to work today so bear with me.
This is a simple chart to read if you understand how to trade these market internal indicators (
New York Stock Exchange
volume ratio, NYSE Advance/Decline line, and Total Put/Call ratio).
The chart explains how I get a read on the overbought/oversold conditions in the market. There are several other criteria needed to pull this trade off, but it is these charts which tell me to start getting ready to take partial profits, buy or take short positions.
The top section shows the NYSE volume ratio line. When the green line spikes, it means there are a lot more sellers than buyers and I call this fear. On the other hand, when the red line spikes it shows everyone is chasing the price higher because they can't stand the thought of missing another rally. I call this greed or panic buying. You buy into fear; sell or short into greed.
There's an important point to note though -- we got another sell/short signal (Wednesday), but knowing volume will be light on Friday, and knowing that light volume means higher prices, I think we should get a better opportunity to short this new downtrend next week at possibly a higher level.
The market may have a short squeeze in the next two to three days. Just so you know, a short squeeze is when the market breaks to the upside on light volume forcing the short positions to cover. This creates a pop in price, only for it to drop quickly after. But if we get a pop with solid volume behind it, then we could just see the uptrend start again and we would then look to play the long side. Only time will tell.
Rising Dollar and Gold -- I Don't Get It?
That's the question everyone seems to be asking. I think what we're seeing is straightforward. Traders and investors are selling euros because of the issues overseas and are buying the dollar along with gold and silver.
Generally, when the dollar rises gold drops. But they are both moving up in sync, and really I don't see the problem with this as it has happened many times in the past. I am currently neutral on gold and silver because of this situation though. I feel something is about to happen in a week or so that will change things in a big way.
The equities market is now in a downtrend and overbought. It's prime for a short position but with the expected light volume on Friday, and most likely a follow-through buying session on Monday, I think its best to sit in cash without the stress of wondering what will happen on Monday.
Chris Vermeulen is founder of the popular trading sites www.thegoldandoilguy.com and www.ActiveTradingPartners.com. There he shares his highly successful, low-risk trading method. Since 2001, Chris has been a leader in teaching others to skillfully trade in gold, silver, oil and stocks in both bull and bear markets.
