Short squeeze or reversal in trend?

With indices attempting to rally following the carnage of the last few weeks, the question now is whether the price action of the last few days is a genuine reversal in trend from primary bearish to bullish, or simply a short squeeze? And to answer this we need to consider the volume on the daily chart, the VIX and the US dollar

If we start with the daily chart for the ES Emini, the problem we have is the some of the days have truncated volume due to the futures breakers operating following extreme moves. Nevertheless, last week’s price action and volume is interesting, and particularly that of Wednesday and Thursday. Wednesday’s price action signalled weakness ahead with deep upper wick and high volume. The following day, a wide spread up candle follows, but on falling volume, and given the extreme volume we have seen on other days in the month, this looks lightweight and is confirmed on Friday with a reversal on good volume. Overnight on Globex, the ES opened gapped down, but as always gaps do get filled. Nevertheless, with the dark cloud over pattern, the rally is looking weak and taking on the shape of a similar ‘hinted/ recovery’ early in the month.

Moving to the VIX on the daily chart this hit a high of 85.5 two weeks ago, and since then has reversed to trade in the mid 60’s and at the time of writing is at 64.1, but showing few signs of reversing lower.

Finally to the US dollar which has seen a V shaped reversal on the daily timeframe as the soaring trend of the early in the month, has now been replaced with an equally dramatic plunge from the highs of 12,950 and now trading 400 points lower at 12,550. Should we see further downside momentum, this is likely to help equity markets move higher. However, given the weight of headline-driven fear and panic, coupled with a looming global recession, even this may not be enough to deliver any meaningful rally, and one is left to conclude the current one is simply a short squeeze.

By Anna Coulling

Charts from NinjaTrader and TradingView – indicators from Quantum Trading