Once again poor upside action

The title of this post is an oxymoron isn't it? I mean, how can an up day be considered poor action? Well, I'm not going to explain again in detail but in a nutshell any major upside that is done primarily via upside gap action is not sustainable because it smacks of emotional panic buying from short sellers as opposed to “legitimate" buying from strong holding longs. Such action is typically what you see in bear markets. Once the panic buying is exhausted from the weak shorts more often than not, back down she goes. Sometimes it could take a few weeks for this pan out sometimes a few days or less...it's very tricky.




Let's take a look at what the reasons for this latest pop is....quite frankly they are weak. Wednesday's gap up was apparently due to strength in economic figures out of Asia....ummm what does that have to do with the US? It's the US that drives Asia not the other way around. When we got that gap up, it was tempting to fade but something was telling me "this is almost too easy to fade". Good thing I stepped aside. Then we saw something that I don't think I've ever seen....a gap up within a gap up! The ISM number was "better than expected". How much better than expected? Not much, but I'm quite sure a lot of traders were bracing for a bad number and shorted the morning gap ahead of the ISM release at 10 am anticipating a gap fill and once this "better than expected" number came out they got torn a new one as they everyone hit the panic buy button at the same time.



So, what's today's excuse for the rally? I'm not really sure I know. I suppose it's because the data came in at around expectations which is like an upside surprise because traders were probably bracing again for bad news. Now the market is back to ST overbought on some measures. Man, I gotta tell you, this is the most traitorous tape I've seen in a long time and unless I see a really good ST risk/reward sets up I'm sticking with my small/micro cap plays on the TSX and TSXV which aren't moving in lockstep with the market.



So, all in all, the strength we've seen these past 2 days is because the data wasn't as bad as everyone feared and shorts were caught pressing with their pants down.



I will not trust this gap up action as being sustainable even with the sentiment indicators as favorable to the bulls as they are. Like July, you can still get good multi-week rallies with "poor market action" to clean out weak bears when sentiment gets highly bearish but you have to keep one foot out the door because such rallies are likely to be retraced once this artificial buying is exhausted. Again, sometimes these rallies last for weeks sometimes just a few days. Tough to tell which.



Nobody said this game was easy...

If we see a gap up tommorow, that would probably be the one to fade