One of the Biggest Short Covering Rallies in History May Be Imminent

by Clive Maund of Streetwise Reports

In recent days the Fed has made it plain that it is prepared to buy anything and everything to prevent imminent total collapse, and you don’t have to join many dots to see that this will extend to buying stocks. It’s not that hard for them—all they have to do is enter a few keystrokes, add a few 0s and it’s sorted—and as Gregory Mannarino repeatedly points out, the more debt they issue the more powerful they become.

Right now sentiment is “end of the world” negative, and any positive development will be enough to trigger a gargantuan, self-feeding, short-covering rally. Gold’s huge recovery is a sign that this may be about to start.

It is, therefore, most interesting to observe on our 3-year chart that the S&P500 index has just hit our long-held target at the bottom of its giant bullhorn pattern, and it has done so with the market in a stupendously oversold condition—at a record, by far.

The conditions are therefore believed to be ripe for a screaming, short-covering rally, and the only question is whether it happens immediately or after some volatile zigzagging around in the vicinity of these lows. Action in gold suggests that it will happen almost immediately. Anything that causes a shift in investor perception could trigger it, and once it starts it could be unstoppable for a while, as shorts race for cover.

The conclusion to all this is that this may be an excellent time to “put our best foot forward” and do calls in the broad market, for which purpose we can use the S&P500 proxy (SPY), whose chart is shown below for the same time frame. On this occasion it may be worth doing the trade in reasonable size, but again, don’t go overboard and bet the farm.

Look at it this this way—there is considered to be 50% chance of a sudden, scorching, snapback rally, and if it works, the options we are looking will rise about fourfold or more. The whole thing could burn out and reverse to the downside again quickly, but by that time we will be out, if things go to plan.

Just because the market rallies here or soon won’t mean the bear market is over. Although the rally could happen immediately, it might be preceded by some base-building, which is why we should go out a few weeks with the options.

An SPY March 17 expiry options table is shown below, and you can choose any series to suit yourself, if interested. A couple of suggestions have been highlighted on it.

Table courtesy of bigcharts.com

With futures showing the Dow set to open up about 930 points, it may be best to buy some soon after the open, and then wait for an intraday dip to do more, bearing in mind that there may not be a dip.

Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London. He holds a Diploma in Technical Analysis from the UK Society of Technical Analysts.