The Rhythm of the Market

And the beat goes like this: Short and cover, short and cover, short and cover.
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Short and cover, short and cover, short and cover. That's the rhythm of so much of this market. We are seeing it right now in the gold market. The cycle of pain goes like this: Gold goes up because of some fundamental news event, in this case the central banks decide not to sell any more.

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The spike seems like it can't last. That inspires the shorts, who have made a fortune betting against the asset for years, to put out more gold. They figure it goes right back down.

The real owners, however, don't sell. If they haven't panicked out by now, they are never going to sell. The media picks up the story of the short, citing weird rumors that some investment bank is getting crushed with a gold short and may have to cover to stay in business.

And then the shorts panic and cover. In this case, they drove the price of the asset to north of $320. The shorts couldn't take the pain. The losses were too great, exacerbated by the media focus.

Then with the shorts out of the picture, gold slinks back to its normal level. I see gold just dropped to $300. I think that is just a stopping point on the way back down to the $200s.

Watch this pattern, it happens all of the time. You saw it in the financials on Friday, where there was massive capitulation by short-sellers. You saw it in

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ahead of the quarterly earnings, where the stock bolted 6 points in a short-cover panic.

You saw it in the cell-phone stocks after that cancer-scare story last week failed to deliver the goods.

You can make money gaming this pattern. You just have to be aware that a massive amount of shorting goes on at all times, but particularly when a trend has delivered such great returns.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

jjcletters@thestreet.com.