Virtually everything rallied on Wednesday. We saw equities, bonds, gold and light crude oil all close in the black. Two of the session's only laggards were natural gas (which seems incapable of attracting a buyer) and the dollar. Unfortunately, I suspect Wednesday's buyer will have to sit some heat before ringing the register.
Though not unexpected given where the market is, I always grow a bit skeptical when the session's biggest winners are heavily shorted, beaten-down names. Of Wednesday's top 10 performers in the S&P 500, all but four show percentage (of float) short figures in the double digits. And of the four under 10%, two are above 7%.
As far as specific names are concerned, Chesapeake Energy (CHK) gained 23% on the session, and currently shows more than 35% of the float being held short. Freeport McMoRan (FCX) gained more than 15% and shows nearly 18% of the float being held short. Additional names to review are Murphy Oil (MUR), Range Resources (RRC) and Transocean (RIG).
While my intention is not to downplay the market's impressive price action, I believe it's important to recognize when the action begins to turn more panicked (in regard to short sellers covering), and when heavily shorted names begin posting gargantuan gains. That said, if you're a day time-frame trader, these are exactly the sort of names you want to trade.
Stocks like the ones listed above tend to trade a ton of shares, provide ample liquidity and generally, though certainly not always, remain well bid beyond a single session. The caveat here is when the bid dries up under these heavily shorted names, price tends to plummet shockingly fast. So trade these, don't own them.
In addition to Friday's nonfarm payroll data, we just crossed the two-week mark to the next FOMC meeting. While I will always adjust my day-to-day expectations based on present auction conditions, it seems logical to expect traders to do a bit less broad-based buying until prices consolidate their recent gains. Put another way, I believe two-way rotational chop, with bias toward selling, is increasingly likely over the immediate term. A downside target near the low to mid-1950s would seem reasonable.
Moving on to Thursday's auction, my baseline expectation is for the market's bid to weaken as traders adopt a more cautious approach ahead of Friday's payroll figures. With that in mind, I'd expect responsive sellers to become more active on any drive toward 1987.50 and 1995.25.
All trading beneath 1982.25 encourages sellers to auction price toward 1975.50 and 1971.50, with the first wave of aggressive dip buyers likely testing the water toward 1966.25. As mentioned above, any meaningful correction would likely have traders targeting 1952.75 to 1954.75.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my Twitter feed @ByrneRWS