Wednesday, January 7, 2015

Today's Stock Market Rebound - What to Expect

Today the US stocks rebounded with a gap up and some further gains.  Given the larger obvious moving average uptrend and bull market, but the recent short term sell off, the question is what to expect going forward.

My feeling from the recent rally into the Christmas holiday was that the nature of the rally was a short-covering burst.  Now the gap fill and closure adds weight in my mind to that.  The issue is if the only buying power is short covering, then when the covering runs out, the market will be met with significant downside.

The recent attempted breakout above the December 5 high concurrent with classic technical bearish divergence is a sign that smart money is attempting to cap the rally at that valuation level by unloading positions on the breakout.

The rebound today occurred on significantly lower volume than yesterday, and given the intermediate term technical position coming off the bearish divergence, it looks initially here like this will be short lived and lead to further selling in stocks.  For the shorter term trader or option buyer, I think another successively lower volume advance after today would be a quality set-up for shorting or buying a speculative put option.

Without giving specific trade ideas here, I would think that a typical failed rally attempt last from 2-7 trading days, and often the resumption of a correction is rather swift, so I think that weekly options or January 30 expiration puts could be considered for ATM or slightly ITM puts and may have significant reward to risk potential.

I will try to update as frequently as necessary here to keep you ahead of the major swings if this decline continues.


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