Shorting is the act of selling borrowed shares with the expectation that they'll be returned to the lender after the borrower repurchases them at a much lower price; the difference being pocketed by the borrower.
Imagine the panic if/when the value of those shares begins to move above the level where the short seller sold them. The prospects for having to buy them back at a higher price can be scary (as upside risk is unlimited) to say the least.
When you hear the term "short-covering rally" it's typically associated with a huge upward burst on high volume, often following a general market decline. The assumption being that panicked short sellers got "squeezed" out of their positions; i.e., were essentially forced to buy them back, which exacerbated the market's up move.As that post's title implies, short interest has (had) been growing big time, as traders were skeptical of the market's ability to penetrate those key levels I've been pointing to herein. And, as I've been suggesting herein, the likely catalyst that would have the market moving through those levels and shaking out the shorts would be good news on the trade front.
Yesterday's WSJ article on the Treasury Secretary's alleged push to get the White House to lighten up on China tariffs, and today's news that China is proposing a strategy for eliminating the trade "imbalance" over the next 6 years, seems to have done the trick, for now.
Here's the 3-day S&P 500 3-minute chart: click to enlarge...
Now, please don't get carried away! While the economic and political risk of a protracted trade war demands that we be optimistic that a resolution is in the offing, there remains a challenging road to hoe on that front, and there are other looming threats (Brexit, our own political minefield, etc.) that I suspect has an army of shorts just waiting to pounce on unsuspecting bulls. Thus, let's continue to expect more huge swings in both directions going forward.
Our focus remains on general conditions and the attendant long-term prospects for markets. Good news on trade, etc., is of course good news in that respect as well...