A short squeeze often seems to come out of nowhere but if you look at the price action preceding the squeeze you’ll usually see clues that it was about to occur. See the notations on the ES (S&P 500 futures) 60-minute chart below.
As you can see, some of the important levels often reveal themselves to be important later on. The low at #1 turned out to be a pivot low but it wasn’t important to the price analysis at the time. It only became significant as time passed and price was unable to drop below that low at #3 and when price made a new short-term high at #4. At that point price had made a higher low and a higher high. Bulls were trying to mount a rally but it wasn’t an impressive rally as the candles were overlapping and they consistently failed to elevate above and away from the rising hourly 8 SMA bands. The resistance from last month’s HB (half-back is the mid-point of last month’s trading range) and from last week’s low was formidable as should be expected. The warning sign that the bears were failing and a squeeze was coming was after the candle labeled #5. One, it was a classic bullish reversal candle with a very long lower wick indicating buyers had rejected the sellers near the low of the candle and then following thru with strong buying! Two, price failed to make a new low below the low at #1. That is extremely important information! Price had now twice failed to take out the low at #1. Yes, #3 was a lower low than #2 but #2 wasn’t a significant low. #1 is the low you should be focusing on when candle #3 was forming. So, a bullish reversal candle forming after failing to make a new pivot low should have caught your attention! Where did confirmation occur that the short squeeze was likely about to begin? When price broke out above the combination of last month’s HB, last week’s low and the high at #4 which represented the current price action high. At that point in time it was clear that #1 was a pivot low and #5 was a failed attempt at a new low. Combine that information with the bullish reversal candle at #5 and the whole picture of motivated buyer’s presents itself to you.
Now what? Current price is pulling back from the short squeeze high but the hourly candles are so far remaining inside the 8 SMA bands which indicates a lack of strong selling. Where is the key level if price continues to fall? Obviously the breakout level from yesterday is extremely important support now. Price should absolutely not drop below the 4445-47 area or, if it does, it should quickly reverse back above. In other words price should not find acceptance below 4445-47. If it does then yesterday was nothing more than a short squeeze in a continuing downtrend. If price instead rallies back above yesterday’s high then the pivot low at #1 could turn out, in retrospect, to be the beginning of a significant rally!
Update after the close: Price did find some acceptance below the important support level I mentioned but it still reversed and made it’s way higher after almost 2 hours of trading. That would’ve been a tough trade in either direction so the smart thing to do is…nothing! Sometimes the best trade of the day is the one you don’t make.
Below is the market profile chart showing that price did indeed find acceptance below 4445 only to reverse back above later.
“That would’ve been a tough trade in either direction so the smart thing to do is…nothing!” Well said! Sometimes doing nothing can be just as tough as that trade was, if not, tougher.