This is What Short Covering Looks Like

The short covering rally is in full force. It started on Friday with the news that the fiscal cliff talks were “constructive” this is the only excuse the markets needed to jolt back to life. As we discussed last week the markets ebb and flow. The more exaggerated the move the more the snap back you’re going to get. Think of a rubber band being pulled back the longer the rubber band is being pulled the faster the rubber band shoots when it is finally released. Take a look at a chart of APPL if you want to see what that looks like. For those of you that were in the live trading room with us on Friday you witnessed a plethora of buying marked by several high NYSE TICK readings up to 1300, a very rare occurrence.

One of the tools I used to identify whether bulls or bears are in control of the market is using the NYSE Up/Down Tick Ratio or ticks for short. On most platforms the ticks can be found by using the following symbol $TICK. The $tick represents the number of stocks going up minus the number of stocks going down on the New York Stock Exchange. If the $tick reads +500, that means that there are 500 more stocks going up than there are going down on the NYSE. A +/- 1,000 reading is an extreme reading that occurs when buy or sell programs are hitting the market. The +1,300 on Friday told you that bulls were stepping in and going to take control of this market.

Yesterday the market had a professional gap up. A professional gap is what I define as more than an 8 point gap up or down in the S&P. When that happens we often get a “gap and go” like we saw yesterday with very little pull backs. These are shorts being taken out back and shot.

That brings us today and what I’m looking for the rest of the week. Look for light volume the rest of the week and the short covering to continue. I’m looking for S&P 1400-1410. I am still overall bearish on this market going into the New Year. So that mean these short covering rallies are selling opportunities via directional puts or selling call credit spreads. I’ll update you on Friday with some potential trades based on where the market is at.

Happy Turkey Day.

John F. Carter