Stock Market Viewpoint

Stock Market Viewpoint
Reading the Tea Leaves...

Sunday, October 10, 2010

The big picture & short interest 10/10/10

Stock Market Technical Analysis

                                       click on the above images to enlarge

The two charts above are of the S&P 500 index. The lower is a 35 year chart and the upper is a 8 year chart.  We are now at a major long term pivot point.  The four year down trend line is shown in red.  The 20 year uphill channel in brown lines. With fridays close we are right at the juncture of both.  If we move higher from here we will have a double line breakout and a monster short squeeze potential.  If we move lower from here we will have a failure at double line resistance and it might not be pretty.

To make things even more pivotal there is the short interest on the Nasdaq 100.  The so-called smart money,  is now massively short.  According to the latest CFTC report, "smart money" commercial hedgers are now net short $7.9 billion worth of Nasdaq 100 large & E-Mini Futures.  That is an increase of 5.2 billion from the previous week. The previous record short interests were $4.3 billion in mid Oct 2007 which was followed by a 4 month, 20% loss in the market and $4.2 billion in mid Dec 2004 which was followed by a 4 month 15% market loss.

This is a very powerful double edged sword.  If the Fed starts to lose their ability to keep propping the market up, there could be a very strong downdraft.  If they are successful and continue to prop it and move the market higher, this massive short interest could turn into rocket fuel  for a monster short squeeze higher.

When you consider it all,  the fact that we are at a big double line pivot point, and opposite of all the massive shorting  is a very determined election ramp up in progress,  it is easy to assume that we might just see a little bit of violatility in the next couple of weeks.