SPX Shortsqueeze Fiesta? My long trade.Hi traders!
SPY / SPX is at all-time highs and traders are beginning to short. As we have seen in the Ethereum run-up, this behavior can lead to a short-squeeze fiesta. Ironically, more shorts lead to higher highs, until the very top - from where price finally breaks down for good. Have we made the top? We don't know, so we can focus on smaller timeframes and take one trade at a time.
What is happening?
On the 4h we see a difficult formation that is interpreted by many analysts as an ABC correction of the downtrend. However, on the subwave we see a slight violation of the wave C ratio. We can now assume that we might be in a wave 3 of 5, and pre-market price confirms this bias.
Where do we go from here?
If price goes higher, my assumption is that SPY will reach target 1 or target 2, which I have marked with a red box.
How to trade it?
A short from target 1 or 2 can be an opportunity for a scalp. Assuming that we are in a wave 5, it is safer to long. If price reverses on target 1, the green box (.382 fib reversal) presents an interesting level, assuming that the corrective subwave 4 is similar in magnitude to subwave 2. Should price reverse from target 2, we can easily derive an entry with a new fib pull, looking for the deepest possible level (.5 fib).
What if not?
If price breaks down from here, we can assume that the downtrend is intact and start looking for pullbacks to short into the trend. In that case we are in a motive wave 1 down and short once wave 2 has retraced.
Happy trading!
