From the May 01, 2007 issue of Futures Magazine • Subscribe!

Short covering fuels rally

As the S&P 500 reeled from the late February early March correction, few predicted the market would bounce back so aggressively, adding almost 80 points, worth $40,000, since March 14. “There was so much sell pressure,” says Larry Levin, president of Secrets of Traders, noting S&P futures traded below 1380 that day, and then lower still to 1375.90, before the Federal Reserve altered its inflation stance. “You had a lot of [bears] saying that the S&P had turned lower for the year.” However, the market found buyers and it has rallied continuously since then. “If we break out of the 1460 area in the next five weeks, we could get to 1500.” His caveats are a crude rally or a bad earnings season.

“Our key level last year was 1360 and when we topped out, the revised target was 1450,” says Dominick Mazza, president of Trading thecharts.com. After the violent move that took the futures down 50 points, his next target was 1360. Since the three-way pattern that took us to 1364, the market has been walking the wall of worry with shorts fuelling the rally as they cover their positions every time the market pulls back. “The key to that 1360 turn around was the extreme bearish sentiment,” he says. As long as support holds near 1400, he expects a double top or new highs before consolidation. If not, the move down could

target 1340 to 1360.

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