Short Squeezes and Nipple Piercings (USO,FAS,BAC,GLD)

Oh, my!

 

We’re pushing the bullish story here, not – as some have averred – because we’re perma-bulls; we’re patently not. We’re not perma-anything.

 

We’re chart watchers. When the charts say buy, we buy; when they sell, we sell. And when the underlying monetary and fiscal reality is pushing the same story as the charts, then we have absolutely no problem piling on and encouraging one and all to join us.

 

Today, dear friends, the charts are bullish, the sea of money floating into the investment arena is bullish, and – one more important detail – we’re now experiencing a tremendous short covering rush that will only add to the momentum.

 

New highs? Dow 25,000?

 

We don’t know. But it’s clear from the sheer number of traders who are short, that this particular cog in the bullish engine could gun the indexes higher for weeks, at least.

 

Consider –

 

Back in the summer of 2008, before the financial meltdown of that year was in full swing, short interest on the NYSE hit a record high. That means that a whole lot of very smart investors made one chicken-skin boatload of cash betting on the slide that ultimately transpired.

 

As the chart below shows, we’re now back at short interest levels that obtained during that notorious Summer of Blood, and practitioners of the quant voodoo set up and down Wall Street are trying to figure just what it portends.

 

Here’s the chart –

NYSE Short Interest

Back in 2008, the greater part of that short position was liquidated in the month of October, and except for a few spikes here and there, short levels remained constant through the end of 2013. But ever since then, they’ve been on the rise, even as the market set new highs into the spring and summer of this year.

 

So what will be?

 

Remember, last time, the shorts made money. This time, after a 13% loss on the S&P 500 and 17% on the NASDAQ, the shorts have apparently decided to hang on.

 

We’ve seen a meaningful rebound, but it appears they’re hoping it will be like last time.

 

And there’ll be another downleg.

 

A steep one.

 

But there won’t.

 

Why?

 

Because the central banks of this world and Wall Street itself are far too invested in letting anything of that nature occur a second time. (Not to mention a sitting president who inherited the bottom of a bear market, and will be damned to leave office in the middle of another.)

 

They all know too well that anything even approaching the fear of the September, 2008 would bring an end to the life and leisure they’ve become accustomed to. And so they’ll tweak and fiddle and gerrymander and twist, using all the tools at their disposal to goose the market higher.

Cartoon

And that includes a battle against the shorts if need be.

 

Private Schemes & Public Screams

 

Todays’ short position is largely a product of the wild and panicked hype currently at work in the market. There’s nothing ‘quiet’ about today’s massive short position, as was the case in 2008. Then, the dive took everyone by surprise – or nearly everyone.   Today, the upcoming bear market has been forecasted by investors big and small for months.

 

Which is precisely why it won’t happen.

 

Look for a solid push toward the last retracement highs in the coming weeks.

 

Closings and Openings

 

Before we get to this week’s trade, let’s have a look at an initiative that we opened on January 26th in a letter called A Watched Pot Never Boils. There, we urged you to sell a straddle on the United States Oil Fund ETF (NYSE:USO).

 

We said –

 

First, it’s clear to us that oil and China ain’t going nowhere in the next short while. While literally everyone is now taking direction from those two items, nothing – absolutely nothing, as we outlined above – is going to happen to either.

 

With USO hovering a few cents above $9.00, we directed you to sell the February 26th 9 CALL and 9 PUT, for $0.73 and $0.59 respectively. Total credit on the trade was $1.32.

 

And today, with expiry just a few days off, we’re urging you to shut her down. USO is changing hands at $8.91 – exactly as we foretold – the CALL goes for $0.20 and the PUT for $0.25. Buy them both back and you come away with $0.87 on $0.45 spent, or 193%.

Yippee

Good on ya if you loaded up here.

 

Another one!

 

On the 9th of February we wrote a piece called Insiders Buying, in which we urged you to avail yourself of an insider buying spree in the financials by buying shares of the Direxion Daily Financial Bull 3x ETF (NYSE:FAS), then trading for $16.39, and selling Bank of America (NYSE:BAC) against it for $11.20 a share. Total debit was $5.19.

 

And today, just two weeks later, prices are as follows –

 

FAS goes for $20.70 and BAC for $12.53. Sell the former and buy back the latter and you have $2.98 net on $5.19 down, or 57%.

 

Beats a quart of cod liver oil, bud.

 

Finally, a word on last week’s trade that pitted gold against silver. We’re up some 20% to date, but are holding out for more. Both metals, but particularly gold, look to have significant declines in store.

 

Wrap it up, Huey!

 

We’re going to stick with the gold theme for today’s trade, because we spied a Japanese candlestick pattern that looks outright radioactive.

 

It’s called a ‘gravestone doji’, it’s as bad as it sounds, and it looks like this –

GLD

This is the SPDR Gold Trust ETF (NYSE:GLD) for the last six months, and by all indications, it’s bearish.

 

To begin, we’re coming off a one day spike in volume that coincides with 1) a gap to new highs and 2) a push into RSI overbought (all in blue).

 

Taken together, these are indicative of an extended turn lower. The gravestone doji adds weight to the immediacy of the pending decline. It appears the next move will be steep and will start now.

 

For that reason…

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Wall Street Elite recommends you buy the GLD March 24th 113.50 PUT for $1.92, and sell the March 24th 118.50 CALL for $1.79. Total debit per pair is $0.13.

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With kind regards,

 

Hugh L. O’Haynew

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