Short Squeeze Leads to a Kick in the Bulls (UPS)

 

Believe me, friends, there’s nothing more terrifying than a short squeeze.

 

Take any dive in the market you want, take a near miss on the highway, take a clean and jerk attempt gone dreadfully wrong – it don’t matter. Being short when the market turns on the jets is an experience that competes with the heart-stopping horror of your first 3-D screening of Creature from the Black Lagoon.

 

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We know because we’ve been through it a couple of times, and believe you me – there’s nothing there but trauma, depression and a month’s worth of bilious stomach upset.

 

Is that what’s happening now?

 

You got it.

 

We don’t know if it’s over or still has a ways to run, but we’ve seen the big cats exiting the market in droves since the summer swoon began (see chart below), and we’d be willing to bet a good wad of our hard earned bread that it wasn’t just a simple matter of unloading inventory. No way. The brothers were stepping on the gas. They were shorting this market like rubber-truckers, and they’re all getting spanked now.

 

You can see it in the charts of nearly all the big NASDAQ components – everyone from Tesla to Microsoft to Facebook and Apple. All of these stocks, and others, have gapped higher at some point in the last ten days, pushing the composite index just short of its highs, a development that we believe will have one and all reversing their positions forthwith in an attempt to front-run the inevitable pile-on into equities that’s about to happen.

 

First take a look at a chart of the big guns making their exit –

 

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This chart illustrates very clearly which cohort was most active in the summer’s sell-off. Maybe they were expecting something worse, but the professional gunners were in full panic mode during the first sell-off in August (also, by the way, the first real market pullback of any significance since the summer of 2011). But their selling continued afterwards, too, at a steady rate through September, even as the market was correcting.

 

Our contention is that these same folks have been badly burned in this latest surge higher, and that all the funds they’ve withdrawn since the beginning of the year – some $20 billion in total – will shortly find their way back into the equity market, pushing us back into record territory in one final blast toward financial nirvana.

 

Exit All Short Positions Now

 

If you had the good fortune of shorting the market at the summertime highs, and are still holding your positions now, dump ‘em. You won’t get another chance. There won’t be a double top here – as some are contending. Now is the booster phase of the lift. The last chance to board before the fuel runs dry and the profits dry out.

 

There will be time, there will be time…

 

Shorting stocks is an activity that will be profitable down the road at some point, and we’ll be there to advise you when it arrives. In the meantime, it’s time to get long.

 

Let’s have a look at some charts that point toward a new bull phase in the making.

 

We’ll start with oil.

 

This is crude for the last year –

 

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The chart shows a steep decline into August, concurrent with the selloff in stocks (red arrow), and since then, a 20% ascent accompanied by good basing action in the $45 region (black circle). The headline oil stocks have fared even better. Exxon Mobil, for instance (NYSE:XOM), has climbed better than 30% off its lows and we believe this bodes well for the entire sector, as the oil companies tend to lead the commodity.

 

Why is oil important?

 

A great deal of uncertainty in global markets this year centers around oil. Was the steep decline in the price of the commodity supply- or demand-based? There were reasons to believe that Saudi dumping was responsible at one stage, but later in the year it became clear global economies were slowing, and some felt a demand contraction was behind the price drop.

 

Today, with the price stabilizing and potentially moving north of $50 a barrel by year’s end (as most analysts predict), the oil element of today’s market anxiety is fading.

 

One would expect a rising crude price to impact negatively on transportation stocks, but the opposite has been the case. With the Baltic Dry Index also stabilizing and orders to move goods domestically and internationally picking up, the trannies have been anything but pressured.

 

Here’s the Dow Jones Transportation Average –

 

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The action is very promising. RSI and MACD indicators (in black) are both above their mid-way waterlines, a bullish indication that matches the movement of the index, higher by ten percent since the August lows.

 

An ascending triangle (in blue) is also a technically bullish formation. Any move above the upper line at 8325 would trigger technical buying that would test the long term moving average at 8400 (yellow line).

 

We believe the trannies will retake that line by mid-month, so we’re focusing our investment lens on the best performers in the sector.

 

One of those companies is UPS (NYSE:UPS), mover and shaker of all things movable, whose stock looks like this –

 

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  1. UPS shows no sign of being overbought – RSI and MACD are above their waterlines and bullish.
  2. Price, too, is trending cleanly above all the moving averages – all of whom are themselves rising.

 

We see no reason to question the trend.

 

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Options Trader Elite recommends you consider buying the UPS January 105 CALL for $2.12 and selling the UPS January 100 PUT for $1.71. Total debit on the trade is $0.41 per pair.

 

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Options Trader Elite recommends you consider buying the UPS January 105 CALL for $2.12 and selling the UPS January 100 PUT for $1.71. Total debit on the trade is $0.41 per pair.

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Many happy returns,

 

Matt McAbby, Senior Analyst

See what people are saying...

  1. Ron Kaczmarek

    Thanks for all of the great information!!

  2. fincatiti

    iranian oil entering market openly next 6 months will drive supply up significantly putting pressure for 2016 on oil prices

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