The chart below was posted in the chat room yesterday by a Rick’s Picks subscriber evidently at the point of despair over the stock market’s inability to muster a sell-off worthy of the name. The three-day downtrend reversed by yesterday’s swoon is a case in point.  This was the first time this year that the Dow average had fallen for three consecutive sessions. And yet, the drop from high to low was a mere 250 points — barely enough to placate beleaguered permabears, let alone satisfy them.  And although some of them may have experienced a little tingle Wednesday night when index futures were down the equivalent of an additional 250 Dow points, the exhilaration was short-lived, since DaBoyz engineered a low at around 2:30 a.m. Eastern that served as a launching pad for the ballistic rebound that was to hold sway for the next 14 hours. The Dow finished the day up 180 points — a roller coaster ride of 430 points.

While few would challenge the assertion that the stock market has become a sleazy midway game rigged for the benefit of a relative handful of shadowy, high-tech arse bandits, it is not the so-called algo-traders who are doing most of the manipulating. While it is indeed possible for these thimble-riggers to push stocks higher or lower via quote-stuffing and other strategies developed by digital trading’s netherworld (aka “dark pools”), the most significant rallies have come, as always, from old-fashioned short-covering. As we have pointed out here many times before, mere buying by bulls will never be powerful enough to push stocks through heavy supply to new record highs.  But short-covering is easily up to the task, since it is impelled by margin calls on traders who are getting eaten alive by every uptick. To set them stampeding, as has occurred a hundred times over the last few years, DaBoyz need only pull their bids overnight, letting stocks fall on nearly non-existent volume.  Then, the selling have been exhausted, as was the case at 2:30 a.m. Thursday, They simply await the inevitable mote of bullish news that will catch shorts with their pants down.  Such news is never long in coming, since anything besides an outbreak of nuclear war will always be regarded as bullish. And the worse the economic news the better, since it supposedly means that the Fed is less likely to do something it can no longer do anyway – i.e., tighten.

Buyers Tiring?

In the meantime, although we don’t want to give bears false hope, the trendline shown in the chart above merits watching. The fact that it has been touched twice in a little more than a week could be a sign that buyers are tiring. Were it to be touched a third time before a seemly interval (i.e., 3-4 weeks) has elapsed, we doubt that it will hold up. Our own, purely technical forecast calls for a 1600-point rally in the Dow. This seems so preposterous, however, that we continue to keep one foot on the fire escape, so to speak, as we trade the intermediate swings.  One thing seems nearly certain: When stocks finally break down there will be no opportunity to get short. That’s because the first hellish leg will occur on a gap-down opening following a short-squeeze spike erected the day before. If you’d like to see how we make playing this game of chicken less perilous – making it downright fun, even –  click here for a free trial subscription.