Sellers Taking Back Control

Early last week we recommended closing short positions due to the fact that the SPY had extended too far away from its 50-week average and was trading near weekly B-Band support. This recommendation kept a lot of traders out of trouble as the SPY gapped up an astounding 6% on Friday following a big up day on Thursday.

Unfortunately for longs buyers failed to follow through on Monday and we are now seeing continued price erosion.

Two weeks ago we noted that the market was not showing signs of stabilization given the fact that both the 50-week average and lower weekly B-Band were both continuing to make new lows. Based on this steady indicator erosion we recommended getting more short at that time. That recommendation also proved to be profitable for those who closed those short positions early last week as we recommended.

Now that shorts have been squeezed, as risk indicators indicated they might, we once again find ourselves back in the same boat we were in a couple of weeks back. The 50-week average and the lower B-Band continue to erode. And with the short squeeze out of the way, there now seems to be a lot of traders who bought into the excitement late last week who are now stuck on the wrong side of the trade.

Short risk remains high just due to the fact that the market is still technically oversold. Near term, however, a lot of pressure was released and sellers appear to once again be in control.

We recommend a light short position at current levels as long as tight stops are used. Shorting bans on the financials are not going to keep prices from going down if sellers continue to unload their positions, which they were certainly doing today.