Buyers jumped into the market yesterday, taking back about one-third of last week��s losses. The reason given for the recovery was that was no new news had come from Europe or theUnited States. In other words, the stock market is so oriented to news that no news is good news. Imagine what would occur if good news was announced.
Whatever the cause of the rally, volume on the NYSE was just under 1.2 billion shares with advancers ahead of decliners by about 2-to-1 on both the Big Board and Nasdaq. For the period ending Sept. 15, the short interest rose 5.48%, which is the highest since March 31, 2009, according to The Wall Street Journal.
Short interest is the number of short-selling positions on the NYSE that have not been closed out. Whenever short interest rises, there is a high probability of a sudden short-covering rally, like yesterday. Most of the shorts are held by high-volume speculators who are easily frightened and cover in a frenzy.?
Note this chart of the Dow Jones Industrial Average with arrows in October 2008. A short-covering rally occurred on Oct. 13, following the two-week decline, and the Dow gained 937 points. But on Oct. 15, the Dow fell 734 points.
Bear markets are characterized by their extreme volatility. The big one-day rally of 937points turned out to be a fizzle. From the close of Oct. 13, 2008, to the ultimate low of March 6, 2009, the Dow gave up an additional 2,760 points.??
Yesterday��s gain of 272 points appears to be nothing more than a short-covering rally following the breakdow! n from t he bearish flag. We could get a couple more days of buying before the bulls give up. They will most likely encounter resistance first at the flag��s former support line at 11,117 and then at the 11,313, the blue 50-day moving average.
The major trend is down. All rallies should be considered opportunities to either liquidate losers or sell short.
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