This speculation in the market is not negative on its own. It is negative because of the knock-on effects. You cannot force shorts to buy/cover and think there will be no other problems in the rest of the market.
Think of it like when you put on a tight pair of jeans. Sure, you squeeze into them and can even zip them up, but the fat has to go somewhere. If it is not in the jeans it must go somewhere, usually up and over the top.
So the guy who runs a long/short fund is getting crushed on his shorts. And even if he is not getting crushed, he is now scared that someday soon the short busters will come for one of his names. So, first he starts covering shorts. But then he also starts selling longs. Gotta keep it even.
Have a look at some of the hot names of late and you can see what I mean. Peloton (PTON:Nasdaq), Roku (ROKU:Nasdaq), Shopify (SHOP) - Get Free Report, and Twilio (TWLO) - Get Free Report just to name a few that have taken it on the chin of late. It just doesn’t happen in a vacuum. Neither does the fact that the breadth was once again negative. Not only that, it was negative for two consecutive days, which is the first time since before Christmas. So there has been an underlying shift in the market recently. First it showed up in the McClellan Summation Index refusing to participate in 2021. Now it shows up in a change in pattern for breadth.
The Transports have been green exactly one day since Jan. 15. The Russell 2000, the darling for the last few months, is selling at the same price it was a week ago. We might not be able to go down, because the selling dries up, but underneath there has been plenty of leakage.
On the sentiment front, the Daily Sentiment Index (DSI) for Nasdaq tagged 90 today. I will end with a minor positive note. The Dow has been red for four straight days. It hasn’t gone five straight red since February last year, so maybe tomorrow, with the Fed meeting, we get a lift.
We had a bit of luck with Beyond Meat (BYND:Nasdaq) today, but I want to mention that the move was beyond speculative. It is because there were so many shorts in the name. We revisited eBay (EBAY:Nasdaq) a few weeks ago and I was still positive on the chart. I still am but I want to alert you that earnings are out next week (Feb. 3), and if it trades under $56, it will spoil the chart. I’m in favor of taking some profits up here.
The McClellan Summation Index is heading down.
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Aphria (APHA:Nasdaq) is involved in a merger, so it’s really hard to say much about the chart. It is over-extended, but hasn’t done anything wrong yet. A move under $12 would be a short term negative.
Zynga (ZNGA:Nasdaq) could get interesting if it can hold over $10. I would keep my eye on it in the coming days/weeks. I don’t think I would anticipate a move today, but would put it on a watch list for sure.
Rocket Companies (RKT) - Get Free Report is forming a base. Some sideways action in this $22-$24 area would be a big positive I would not want to see it back under $21, though, because that would mean it is going to take a lot more time to work out.
Pretium Resources (PVG) - Get Free Report gets interesting around $10, although, I think it will take a long time to improve if it is going to improve. You do not want to see it break under $10 in a meaningful way.
Upwork (UPWK:Nasdaq) is a stock in an uptrend, but it is not my style to buy stocks at highs that have not spent time basing. I’ll call it a hold.
Nicino (NCNO:Nasdaq) looks to me as if it is in a trading range and having just left the bottom of the range should now attempt the top of the range (around $85). You could trade for that.