Melt-Up Triggers Short Squeeze In Nasdaq And Utilities Breakout

A. Short positions were getting squeezed after the end-of-week rally in the markets last week. The upside price pressure early in trading on Sunday/Monday likely forced many of these shorts out of the market – creating a short squeeze.

B. Global traders may be interpreting a biased election victory by Donald Trump based on news events or other information. This close to an election and with pending Q3 earnings just days away, a melt-up rally like this is fairly uncommon – unless you take into consideration that global investors may be pre positioning for an expected outcome.

30-Minute Chart of Nasdaq Showing This Week’s Rally And Squeeze

Still, one can’t discount the upside move in the NQ today, as seen on this 30-minute chart (below). The rally started off moderately strong, then London opened Monday. After London opened, the momentum grew and price began to rally even higher. We believe this rally phase will abate after the momentum phase has pushed prices high enough to prompt some concerns. ou can’t fight the squeeze when it happens, but you can’t chase it very long either.

Dow Jones 30-Minute Rally, or Lack of Rally from Underperforming Sectors

The following YM (Dow Jones E-Mini Futures) chart, on the other hand, represented a very small rally phase compared to the NASDAQ. This suggests more interest was centered in the Technology and Healthcare sectors recently as traders attempted to scoop up call options ahead of earnings. The Dow Jones and the S&P 500 were still higher today, but these two major indexes were not included in the dynamic short squeeze like the NASDAQ was today.

Daily Chart of Utility Sector Shows Signs of Leadership

If you take a look at the following (Utilities Select Sector SPDR® Fund (NYSE:XLU)) it is clear that in the past few weeks they are outperforming almost all other sectors. New multi-month highs, strong momentum, and this is what happens when investors start to become nervous. They buy defensive companies that will always be needed during a recession.

Take a look at what utilities did in Jan/Feb when investors started to get nervous about the economy/COVID. I look at utilities as one of the last moves before a market correction.

Our research continues to suggest we are still in a bullish price trend. Our Super Cycles research and other predictive modelling system suggest volatility and risk factors are still very elevated. In other words, we believe the U.S. market trends are biased to the upside right now and may break higher after the elections. We are also very cautious of election volatility and unknown factors such as earnings and other issues.

As of today, Tuesday, the NASDAQ is continuing higher as positive earnings start to hit the wires.

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