Short squeeze relay

We had a fairly quiet week. The market was up all 5 days but by very small amounts each day. The market has been able to hold up despite a ST overbought condition. Is this a change in character which suggests we have started one of those multi-month bull runs like what we saw from November to May? Could be but I have my doubts. I think what we're seeing here is a case of traders getting caught short one after another squeezing each other, pushing the market higher in the processes.  I've seen this happen so many times since 2009 whereby one group of trapped shorts capitulates pushing the market higher creating a domino effect by triggering the capitulation of the group who are trapped just above them and it keeps going and going untill enough bears are too affraid to top pick and there's no one left to squeeze.  It all started after the "Draghi disappointment" which gave bears the all clear to fire away shorts/puts/bear etfs, which turned out to be a massive bear trap given the surprise payroll number the next day which jacked the market with a large gap up. I'm sure that gap invited even more shorting but they got ran over as the shorts from the day before ran for cover. Now we have another group of shorts who are top picking at the 1400 resistance level and now they too are trapped albeit modestly at this point with the help of the capitulation of last week's shorts. It's the Olympic short squeeze relay as one group of bear bag holders passes the bag to the next!

This type of short squeeze relay can end up being a dead cat bounce, which once exhausted, leads to a sudden and abrupt decline or it can be the spark that ignites a larger, LT move. I get the feeling it's going to the former but there's a good chance we see one last squeeze to 1415+  first as there have been too many weak trader types betting against the market at 1400 from the looks of it. It seems unfathomable, but we are only 18 points away from making a new 4 year high in the stock market. I gotta tell you, Mr. Market always seems to find a way to make fools of everyone including me. I, like a lemming, have been expecting to see another downside scare for some time now and although I haven't lost any money betting on it, I've been wrong about that. Sure, I could be early and eventually proven right, but it just goes to show you how tricky and elusive Mr. Market can be. 

When I look at some LT variables like bond yields and the Euro, they are at levels are indicative of major bottoms in stocks. If you look at recent history, anytime bonds have had a strong multi-month advance accompanied by a strong multi-month decline in the Euro (a dual signal of major risk aversion) a LT bottom in equities was in view so it's quite conceivable the the June low was the bottom. But the strange thing is that despite the severity of the bond rally and accompanying  Eurodecline, the US equity market did not decline in kind. We only saw a 10% drop in stocks and with these strong trends in bonds and euro unwinding a bit, the market has rebounded a lot more relatively and is closing in on a new bull market high! I've been expecting a retest or at least another stab towards the June lows but I've been wrong so far. 

Here's the problem with this rally. We got oil prices zooming right back up with gas prices approaching the highs in the spring. We got a VIX that broke below 15 which has been a level associated with a market that's either at a top or on its way to one (limited upside). We also have Rydex and NAAIM numbers that suggest we're closer to the end of an intermediate term advance than the beginning of one. Lastly, there was significant gap up action in this advance which to me suggests "unhealthy upside action" (you will know what I mean by that if you've been reading this blog for some time).  So, in conclusion, if we do advance more here because of an continued short squeeze - and I think there's a good chance we will (minor dips aside), it will probably be a bull trap and lead to an abrupt downside move. I doubt it will be a crash but rather something scary enough to put the IT indicators back towards pessimistic readings. If that were to happen, then the market would be in much a better position to make one of those big, 30% multi-month advances to new highs.  

In the meantime, I will continue to look for ST trading setups. I haven't made any trades since that last little score last week. I want to play the squeeze to 1415+ I envision with an option play, but as of now I don't seen an attractive enough risk-reward set up.  

I should also say this...for months now, this market has been a favorable environment for ST traders who buy the dips and sell the rips while frustrating the trend traders and investors. That's likely going to reverse soon.  I'm fully aware that my willingness to engage in ST trading could be a sign that I'm late to the party and that we're probably close to the point where a big, sustained move up or down (I'm thinking up) in the not too distant future (could it have already started?). The problem with focusing on the ST all the time is that you get myopic and fail to adjust in timely manner when the market changes character. I will try my best to avoid doing that. Once the market is in a strong directional move, you will find that ST trading won't work nearly as good as long term position trading even if you're on the right side of the market.