ESP Tuesday: Short Squeeze Develops. Let’s See What Happens Next.

Plus Two New Low Risk High Profit Potential Picks.

Image courtesy of lenpenzo.com

Don’t take your eyes off your trading screens.

The stock market is rallying in a big way this morning, as would be expected since everyone has been bearish and any good news could trip the algo buy programs. Of course what really matters is that the bullish tone sticks. We should know in a few days.

They’re still bearish. The CNN Greed/Fear Index (GFI) is at 5 this morning showing extreme fear while yesterday’s Put/Call ratio was 1.20 as the CBOE Volatility Index (VIX) hit 45.

Nevertheless, as I noted yesterday, we are near that point in any bearish trend where there is almost no one left to sell, and there is no point in walking away while we wait to deploy our shopping list.

Lately, I’ve been writing about extraordinary events related to the so called normal distribution of stock prices lately, alluding to the Sigma concept and its relationship to stocks, the Fed, transistor radios, algos, and social media.

A bit More About the Sigma Concept

Stocks don’t trade in what would be considered a “normal” statistical distribution. Nevertheless, it’s easier to communicate in terms of what’s “normal” and “abnormal” in terms of daily life and related occurrences. So, if you use “every day life” as a reference point, and then use the Sigma terminology as a proxy for such occurrences, you can get the point across.

That said, yesterday I wrote about the S&P 500 (SPX) delivering a four Sigma event when it touched the lower Bollinger Band corresponding to four standard deviations (4SD, purple line) based on its 200-day moving average at the open. When viewed from a “real life/normal/abnormal” viewpoint, a Four Sigma tag of the lower band is akin to someone being born or dying four times, which is almost unheard of.

Indeed, the last time we had a 4SD event was in March 2020. Yeah, the recovery after the COVID bear market, which was prompted by the Fed’s QE tsunami. What’s most interesting, is that this 4DS effect did not bring the Fed off the fence.

All of which brings me to the conclusion that we are living through extraordinary times which will require extraordinary measures to correct, or attempt to correct, perhaps without the Fed at least in the short term.

So, where are we? We are either near the end of the bearish trend or we could get a Five Sigma event where, as I describe below, SPX tags the 5SD line (purple) just above 4500. That would likely be disastrous.

Market Update

As expected, stocks are rallying one day after the four sigma tag of the lower Bollinger Band in relationship to its 200-day moving average.

The next important development is whether SPX can cross above the 3SD line (green) and continue moving higher. The odds favor such a development given the extraordinary selling we’ve seen over a short period of time.

The New York Stock Exchange Advance Decline line (NYAD) is back inside its accompanying 2SD Bollinger Bands, which is a positive development after it hit an oversold reading of 30 on the RSI. A move above the 200-day moving average would be a big positive.

Bitcoin is quite tentative this morning with $80,000 providing short term resistance.

The U.S. Dollar is showing some resilience this morning. Support is at the $100 area for the U.S. Dollar Index.

The U.S. Ten Year Note yield (TNX) is testing its 200-day moving average, suggesting that bond traders are less convinced of a recession now.

This morning, I am adding two new trades to the ESP Portfolio.

Thanks to everyone for your ongoing support. I really appreciate it.

Thanks also to all the current Buy Me a Coffee members and supporters. Special shout out to new members who now have access to the Sector Selector ETF Service, included, at no extra charge with your Buy Me a Coffee membership.

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For large potential profits with longer term holding periods in stocks check out the Smart Money Passport Weekender Portfolio.

If you’re thinking about day trading, my new book – Day Trading 101

– will get you started along the right path.

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