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Market Rally For Second Day? Up To Momentum Traders

A two day rally? Hasn't happened once this month. We're heading in that direction today. What's up? It's mostly about short covering, but that could change. But wait--won't they try to sell into the rally in the last hour? That is certainly the strategy that has worked this month. Remember--much of the market today consists of momentum traders, many of whom just go with what's working--until it doesn't work anymore. What's working is sell in the last hour.

There is some hope that this strategy is starting to exhaust itself:

1) Financials are down 10% this month, the biggest one-month drop in five years;

2) The Street remains extremely short financials, which leave them vulnerable to a very sharp, short-covering rally (that's what's happening today);

3) The Street has raised very large cash positions in the past two months, at a time when there are usually seasonal rallies. If there is some sign (like a rally a few days in a row!) that even a modest rally is in the offing, traders will abandon their current caution and bearishness and move into the market, if only in an attempt to capture some end of the year gains.

The key is to get a modest rally for the next few days.

Wednesday a big decline, Friday a big rally, Monday a big decline, yesterday a big rally...is your head spinning? How volatile has it been? According to Lowry Research, yesterday's 215 point gain in the DJ Industrials was the 5th triple digit change in that average over the past 6 trading days. Overall, in the 34 trading days since the Oct. 9th rally high, there have been 16 triple digit changes in the DJI with nine losses and seven gains.


Questions? Comments? tradertalk@cnbc.com

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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