Market Rally Or Short Covering?

Yesterday was another big day in the markets!

Don't get too eager to jump in with long positions, though. Look back several posts. We saw similar price gains about a week ago and I'll wager that a lot of folks jump in just to see the market reverse.

The image above is a daily price chart for the S&P 500 from the MarketClub service. You'll notice on the right hand side of the chart that there are two green arrows. Those are potential "buy" signals generated by the Market Club service, which were triggered by the large price moves last week and, again, yesterday.

The problem we have is that yesterday's gains were on low volume and may very well have been a lot of short covering following the carnage that followed in the wake of the Bear Stearns fiasco. If there is no new institutional money to push a rally to new heights, that rally is doomed to fail.

We could still see a rally, however. I'm just not sold on the idea that now is the time to jump in, despite our green Trade Triangle from MarketClub.

So, what's the deal with these green triangles if I'm not taking the trades?

Fair question. The triangles do no work in isolation. You need to evaluate the buy signals, and the sell signals, in the context of the overall trend.


This second price chart is a weekly chart of the S&P 500, and it clearly demonstrates a downward trend. Plus, the last trade signal generated was a "sell."

If you want to take high probability trades using MarketClub, you'll look at multiple time frames and select only those trades that demonstrate favorable conditions in each. We have a "sell" on the weekly chart and a "buy" on the daily. Those signals conflict and that reduces our odds of success considerably.

The pre-market conditions suggest a lower open today. Let's see how things play out from here...

Trade well, and please do mind your risk!

Christopher Smith
TheOptionClub.com