Professional money had sold into the liquidity ramp that preceded this break, adding to their existing short positions. Somewhat coincidentally, they then pulled liquidity before the calls accommodating the sell-off. They proceeded to cover about 25% of their shorts on the break, while weak longs puked and flipped short.

This now leaves the market in a situation where the dumb money is a small short, and the smart money is still a relatively large short, which goes a long way in explaining why there was a short covering rally, on less than spectacular volume, ahead of last weekend. This also indicates large traders are reducing their short exposure as small traders begin to get short.

Given the current market structure, seasonality, willingness of global central bankers to add liquidity, and professional short covering, it would appear that the path of least resistance would be up. However, any bullish sentiment must be tempered by the current context of the market, i.e., Eurocratic risk.

Still very short, institutional traders will pull liquidity at the first sign of indecision or negative news or have their bots step down a vulnerable market. This of course, offers a wonderful opportunity to accumulate some longs.


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