SHORT COVERING?

Today's rally was expected...at least we expected that there would be a rally in the near future. The market was extremely oversold and was likely to bounce. The question is whether or not this bounce is a buying opportunity or an opportunity to buy more puts. It is too early to tell. Today's rally was likely due to short covering. When you short a stock, you borrow the shares from your broker and sell them to open the position (sell first). When the stock price goes down, you then buy back the shares to close out the position. Since we had such a big move down over the last week, the short sellers were likely closing out some of those profitable bearish positions. All that buying to close out those positions likely caused the bulk of the move up today. Will the buying continue? I think it will, but probably not until Monday. Although the market is still very oversold, I doubt that very many traders will want to buy going into the weekend. The S&P 500 is a good distance below its 50 day MA. This another possible signal for a rally. The next big support is down at the 1250 area on the S&P 500. It is still possible that the market will work its way down to that level before staging any significant rally. If we move below Wednesday's low tomorrow, you might want to look at buying some put options on the SPY. I don't think I will try to play any bullish move. I think that any rally that we have will likely set up for another move down. Once we closed below 1295, it increased the probability that we would test 1250. If we do rally up tomorrow, here are some bullish patterns that you can consider for trades. Many of these need confirmation...like a close above their 10 day moving average. CMG was a put option recommendation from last week. If you traded it, you did very well. Now that it is at its 50 day MA, you could look to trade a call option on the stock IF it closes back above its 10 day MA within the next week or so. Other bullish patterns include NSC, VMW, LAD, CNI, JNJ, KFT, MRK, TRV, and AMZN.