Wall Street Rebounds as the GameStop Bubble Pops

…whilst yesterday’s rebound could be part of larger, bearish move, if it wasn’t linked to GameStop’s bubble being burst, it is one almighty coincidence.

Share markets rebounded overnight on news that a short squeeze on Wall Street hedge funds had come to an end. The S&P 500 (US500) recouped 1.0% of Wednesday’s onslaught and the Nasdaq 100 (USTEC) regained 0.7% during a volatile session.

The main stock behind the original short squeeze was GameStop (GME), a brick-and-mortar retail video game store with approximately 5,000 stores across the US. In recent weeks, this particular stock had been targeted by a large crowd of retail traders from a social media group, with the intent of shaking out Wall Street bears. Impressively, the stock rallied around 1,900% before the miniature bubble was burst. But by then the damage was done; professional traders from hedge funds were holding heavy losses and the rally only intensified as the rest of the world became aware of the extraordinary move.

Many have said that Wednesday’s crash on Wall Street was tied to this short squeeze rally. And this could well be true; if large funds are ‘in the hole’, they have to cash out of other markets to pay for their debts. And if contagion sets in (which it appears to have) then it becomes a self-fulfilling prophecy as investors run for the exit as they see prices falling.

So, Who Burst GameStop’s Bubble?

Well, on Tuesday Nasdaq’s CEO went on air to say they have the technology and means to investigate social media for any signs of ‘insider trading’. The SEC (Securities and Exchange Commission) even weighed into the debate to try and take the sting out of the rally. But perhaps the final nail in the rally’s coffin was the broker’s memo sent out, before the open, stating that trading of GameStop was now restricted to ‘close only’. And traders were quick to close out. After gapping higher around 40%, it peaked around $500 and fell 67% to finally close around $193.

Has Wall Street’s Decline Ended?

Possibly, but this may not be the end of the story, as rumours are now surfacing that the broker is asking for credit lines from banks to remain solvent. But it should also be considered that a rebound following a heavy day’s selling is not uncommon, as volatility and unpredictability picks up. But whilst yesterday’s rebound could be part of larger, bearish move, if it wasn’t linked to GameStop’s bubble being burst, it is one almighty coincidence.

The S&P 500 closed with a bullish inside day (albeit a volatile one) and is back above the 20-day eMA. A break below 12,890 signals further losses, although with prices back above 13,000 it makes a likely support level going forward. However, given prices are now trapped between support and the all-time highs, we could well see prices ricochet between these levels but on lower volatility without a fresh catalyst.

With a Higher Equity Market Comes a Weaker Dollar

The US dollar closed with a bearish inside day and failed to break above Monday’s high, and 90.95 resistance also sits just above this key level. Now we need to see if bulls can break above 90.95 (which assumes a weaker stock market) or head lower towards 90 (which assumes a stronger equity market).

A bullish hammer has formed on AUD/USD, and a break above its high also sees it back above the 20-day eMA. Despite a minor break above 6.5000 resistance, a bearish 2-bar reversal has formed on USD/CNH . A break beneath the rising resistance line assumes bearish a run towards the 6.4120 lows.

Political Tension Surrounding Vaccines Intensifies in Europe

Political tensions surrounding vaccines continues to rise, with the European Union sending a warning to drug companies that they could block exports or ‘use all legal means’ to force them to deliver promised vaccines. With Europe falling behind in the vaccine rollout, the EU have even looked into whether they can slow exports to Britain, whilst Germany have also come under fire for striking bilateral deals with companies to get ahead with vaccinating their population. Given the seriousness of the new coronavirus strains with high demand for vaccines the world over, the following weeks or months could be very telling over how ‘united’ the superpowers really are. Wars have been started over less.

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