After relentless selling all week, the markets finally rallied on Friday, setting the stage for a short squeeze next week.
The indices and many leading names reached deeply oversold levels on Thursday. While that is the moment in time when things feel as bearish as possible, it’s typically not the best time to get short. Getting short “in the hole” puts a trader in the position to fall victim to the oversold bounce, just like we saw on Friday.
The ideal time to short is on the bounces into falling 21 exponential moving averages (EMA). Should Friday’s strength continue into next week, that’s exactly what we’ll be looking to do. While there are a lot of bearish setups on our watchlist, we’ll likely focus on the S&P 500 (SPX) for our next bearish positions.
Looking at the weekly chart of the SPX above, notice that it is setting up in a bearish squeeze under the 21 EMA. Remember the rule of thumb with squeezes: once a squeeze fires, the move tends to last for 5 to 8+ bars.
Given that this is a weekly squeeze, there’s the potential for 5 to 8+ weeks of momentum to the downside. We aren’t just seeing this setup in the SPX. TSLA, AAPL, AMZN, and GOOGL all have similar squeezes.
Because of these weekly structures, we want to short the next bounce toward the daily 21 EMA. Shorting into the strength will offer the best risk-reward on debit spreads or credit spreads. This will allow us to catch the “meat of the move”.
Keep a close eye on things next week, and be ready to consider getting short positions working should the SPX rally into the $4,150 to $4,200 range.