What Changed After Relentless Short Covering Rallies?

A big gap down on Thursday saw the market trading below the January lows. Things quickly reversed to the upside with the strength continuing into the Friday close.

In a volatile, downtrending market, short covering rallies are explosive, sudden, and often relentless. The hikes continue until the market has satisfied the need to rid itself of holding weekly expiration puts. 

The question now is has anything changed?

From our perspective nothing has changed about the bigger picture structure of the indexes. 

Therefore our game plan remains the same: 

Short the bounces into key moving averages as long as the indexes are under the weekly 21 exponential moving average (EMA).

 

 

 

 

Short in Strength, Not Weakness

The key to playing the market to the downside is to time your entries properly, which typically means we are looking to short in strength not weakness…

For the traders who got short on the gap down on Thursday, the rally that unfolded was likely a painful one to sit through. If instead you are placing shorts into strength, the bounce has likely been more tolerable.

For our current Russell ETF (IWM) short in the Compounding Growth Mastery, we initiated the position around $208 to $210. While seeing some open profits disappear this week isn’t fun, we are still profitable on the trade and continue to be in good shape should things continue trending lower into March.

Next week we’ll look to see if the S&P 500 ETF (SPY) and the Nasdaq (QQQ) can grind their way to their 21 EMAs. If so, we’ll be ready to initiate short positions with the idea that the current weekly squeezes will ultimately fire short and send the market into new lows. 

That level sits near $440 for the SPY and $350 for the QQQ. 

As for the IWM trade, we’d look to add to our current short around $208.

 

Volatility Index (VIX)

Another chart to focus on next week is the Volatility Index (VIX). 

The VIX found support at the 21 EMA on Friday and is printing one of our proprietary buy signals, which we didn’t even see before the Covid-19 flush… Very interesting to say the least!

 

 

Enjoy your weekend, and we’ll see you at 8:45 a.m. Eastern on Monday for our premarket prep session on the Focused Trades YouTube Channel.

Stay Focused!