WEEK AHEAD: FEBRUARY 01

Short Description

It has been a battle like David vs. Goliath in stock markets with amateur traders squeezing hedge funds out of their short positions! Will this trade continue into this week and could it cause a correction on Wall Street? I will discuss that and run through the economic calendar. Thanks! Rich

Video Script

Short squeeze to cause Wall Street correction? - WEEK AHEAD (Fed 1-5, 2021)

Hi everyone, what a crazy week for us traders! As I preview this week ahead, I will give my take on the epic short squeeze that has pushed the price of a few small stocks higher by hundreds of percent and what it could mean for broader markets, including the Nasdaq.
First let us have quick look at the technicals for the Nasdaq. The index hit record highs last week so clearly, we are in an uptrend. The uptrend has been properly established since breaking above $9750 in June last year. The price this year has been trading above the 50-day moving average in orange and the 50 DMA is above the 200 DMA in green. All this points towards an uptrend. But given the bout of selling we had last week, it is worth analysing whether a bigger correction is coming.

Before I do, can I ask that you hit that like button? - it really helps support us in making these videos.
Now diving into the economic calendar. We start the week with manufacturing PMIs where China and Europe are set to see some improvement in January while the US slips back from a very strong reading of over 60. The Reserve Bank of Australia decides interest rates on Tuesday followed by Eurozone Q4 GDP, which is expected to have fallen back into contraction. On Wednesday, it is all about services PMIs from across the globe as well as US ADP employment. The Bank of England meeting is Thursday then on Friday of course, we have the January non-farm payrolls report.

Now last week we saw the likes of GameStop and AMC stocks rise hundreds of percent in one day. These stocks saw a short squeeze brought on by an army of day traders - mostly from chatrooms on Reddit. These traders realised that hedge funds were going short nearly the entire market cap of the stocks. As an example, say there were 100 million shares trading, there were cases were over 80 million of those were being borrowed to go short, i.e. betting the stock will go down. So when the positioning was that extreme - it did not take much of a price rise to squeeze these sellers - forcing them to buy back the stock and send the stock prices even higher.

Now, the question is - is this just a story for these few companies or does this start to affect the Nasdaq and other Wall Street indices?  Here is one thing that could happen - these hedge funds have a certain number of trades going long and short to be ‘hedged’. If they must close out some short positions, theoretically hey will have to close out some long positions too. There is also the fact that a few of them have publicly stated that they have taken big losses covering these short trades. If that is the case - they may well want to take profit on some of their winning trades to offset the losses. We are in the middle of earnings season right now and so again if these hedge funds have bought some stocks in anticipation of good news, it might be another reason to sell the stocks once the good news - or bad news as the case may be - comes out.

In summary, the uptrend on Wall Street including the Nasdaq is in place but pressure on hedge funds to sell some stocks is one reason to think a pullback might be due.

Right thanks for watching - good luck trading this week and make sure to subscribe to the channel so you do not miss next week’s video.