A Faltering Short Squeeze

After bottoming out around 3570 in the S&P futures, the indexes have meandered higher as short sellers cover positions on lows of the year. The short covering can lead to higher prices, which can also lead to buyers being enticed to join. However, in this instance, the short covering has been lackluster at best, and buyers have yet to come out of the woodwork.

A Lackluster Bounce

Why do I call it lackluster?

It’s a combination of factors, including the lack of high momentum buying intraday, the inability of the indexes to breach and remain above 3800 in the S&P futures, and primarily for me, the way in which typical short squeeze stocks are acting. This move has only made it to 3800 and has stagnated at that level. This is one of the first upside targets. And, in any case, if it did make it up to 3900-4000, all that would do is create another major sloppy head and shoulders pattern that could breakdown even further. Therefore, the short squeeze, even if strong, would not change my bearish take.

So, will there be more follow-through? So far, I’m not seeing it.

Click on the image to enlarge it.

Most often, when a short squeeze occurs, one of the major signals that it’s following through is that primary mega-cap technology stocks will begin to trade explosively higher as buyers come in to take advantage of low prices. In this case, the short squeeze timing just so happens to line up with the pre-earnings timeframe, just as it did last June/July. Pre-earnings momentum plus an incredibly high put/call ratio can usually lead to explosive pre-earnings momentum to the upside. However, this hasn’t been the case, at all.

Mega-Cap Stock Signals

The core stocks that were previously doing their best to hold up the market last quarter include Microsoft (MSFT), Tesla (TSLA), and Apple (AAPL.) But, in recent weeks, all have faltered, signaling a massive canary in the coal mine. Throughout this rather lame attempt at a bounce in the indexes, none of the three have demonstrated impressive upside moves. This lack of an upwards price trajectory on this bounce is telling, as it demonstrates that thus far, not even buyers of these stocks are enticed by lows.



Tesla & Enphase: A Case Study

Check out this chart of Tesla in the Hot Zone below:

Click on the image to enlarge

Despite the bear market, Tesla still has a 2-year pre-earnings average of trading higher by approximately $20, or 7.81%. But, that’s not happening this quarter. This quarter, Tesla hit the Hot Zone timeframe, the timeframe in which it almost always rallies, and has fallen from roughly $312 a share to a low of $233 a share.

Yes, of course, Tesla has had to deal with a variety of issues lately, including missed delivery numbers, lackluster response to AI Day, Elon’s Twitter purchase, and more. But, that doesn’t change the fact that Tesla almost always rallies pre-earnings and it’s not.

And, it’s not just Tesla. Take a look at Enphase.

Enphase has been one of the hottest stocks in the market, with one of the best, bullish price patterns and solid underlying fundamentals. Yet, the last round of consolidation broke lower instead of higher in the context of the trend and fell 13% yesterday.

Click on the image above to enlarge it.

Canaries in the Coal Mine

These breakdowns may seem insignificant, especially when the excuses for each company are listed, but I’m here to tell you that they are not. In the context of a short squeeze like this, plus what should be a pre-earnings momentum timeframe on some of these stocks that almost always experience positive, directional moves during this timeframe is a bad sign for this faltering short squeeze and overall market trend in general.

I suppose one could argue that Enphase doesn’t matter to the overall market and that Tesla moves on its own. Sure, you can argue that. It’s still possible the indexes experience a major gap through 3800, short sellers continue to cover and buyers burst out of the woodwork, sending prices higher. But so far, that remains to be seen. And right now, all of the signs I’m looking at tell me that there is more downside yet to come.

If buyers aren’t even willing to come into these names, then what?

Want to trade earnings season using a statistically-backed approach? Check out the Hot Zone, which is on sale right here now! 

Up Next...

Waiting on a Dip Buy in Microsoft (MSFT)

Hey traders! The Nasdaq is pulling back today, which, in my opinion, is a much-needed move. With the extended market, buying anything with an edge was nearly impossible. So, while pullback days aren’t as much fun as when the market is roaring (unless you’re short), I use them to identify opportunities. In this case, I’m … Read more

Read More

When a Ticker Makes Targets

Hey Traders! On Monday, I sent you a video about my short-term setup in Tesla, along with my $250 price target. You can check it out in the Tweet below… Since then, the squeezes I noted fired to the long side, and Tesla traded directly to my Fibonacci price target at the 1.272% extension level. … Read more

Read More

A Trade Setup in TSLA

Good morning, traders! The Nasdaq futures are choppy at 16,000 after making quite the run. So, what’s next? Looking for the next round of setups, of course! When tickers and indexes get sticky, squeezes will start to consolidate. Those squeezes generally occur on the lower time frames first. When those squeezes fire, they can either … Read more

Read More

Subscribe Today!

Want my up-to-date analysis, setups, top trading tips, and more? Be a Five Star trader, and join my free newsletter today!

Sign Up Now