Mentioned in last week’s blog, a key for near term bias change was a weekly close above the trend line off of the Nov ’19 highs and the May ’20 highs. The market opened above that trend line, then advanced through the resistance associated with the 40 Week SMA (had only closed above that during the Q4 rally 4 times and had not closed above since Feb ’19), and some of the shorts were forced to cover. The CFTC trader’s report noted that the shorts covered 45,839 positions through Tuesday of last week. I would submit that the majority of those occurred on Monday and Tuesday.
Prices then extended the gains, breaking the monthly trend line and formed the highest monthly price in seven months. These events left the market over extended to the upside, with the Weekly trading 3 standard deviations over the 20 Week SMA with the RSI momentum indicator racing to the extreme over bought level. This was achieved on high (but not exceptional) weekly volume and declining open interest (fueled by short covering). It should be stated, again on this website, that rallies based solely on short covering are not long for this world. We saw that last winter and again in May when the shorts stopped the action, prices retraced quickly. Due to this history, this analyst was startled that the bias remained positive for the rest of the week’s trade.