Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

It was a wild day filled with rumors, lies and speculation in all directions. Welcome to September 2011. After opening lower out of the gate mostly on the back of European banks, stocks managed to fill their open gap. However, with a little less than two hours to go, stocks started rallying out of nowhere. I made calls to bank desks and hedge funds but no one seemed to know the reason for the sudden giddiness.

Italywas to get a helping hand from Chinese investments in the Italian bond market. Once the news was confirmed, stocks staged a firm rally that quickly led into a classic bear market short squeeze where those leaning short near the bottom of the day were forced to quickly cover their negative bets no matter what price. It’s a trading environment at the moment, and by the feel of it will remain this way for some time.    

In terms of the chart of the S&P 500, this meant the daily candle left a long tail, actually closing green. As usual when we see long candles at the bottom, a confirmation up day is required; however, given this “quicker than the ticker” environment where direction seemingly changes daily, we may not have the luxury to wait an entire day for confirmation. Quicker traders would need to buy much sooner and get out at any sign of weakness. For the rest of participants, any rally is a better opportunity to unload remaining long inventory.

With yesterday’s positive close the bear flag (blue line) had held as support another day and the likelihood of somewhat higher levels in the immediate term are somewhere in the 60% to 70% range. Should today’s market open bleed red, however, we would see the bear flag breaking soon. Speaking of the bear flag, I am hearing more and more folks pointing out the pattern, making me increasingly nervous that it won’t play out in a classic way to the downside. Squeezing shorts higher and then breaking lower would be a path few market participants are seeing, thus making it more likely. 

Semiconductors as measured by the Philadelphia Semiconductor Index (SOX) were great outperformers by rallying 3% on the day. Semiconductors already started behaving better on a relative basis last week, giving us some clues. We are now left to see whether they can overcome immediate resistance, which on the SOX is right around $360. A daily close above there could be a good indication that the broader market may continue yesterday’s relief rally a little longer.

Banks also participated in yesterday’s happy feet dance, leading the Financial Select Sector SPDR (NYSE:XLF) to close up 1.14% despite bank credit spreads trading wider. At some point, banks should start outperforming the broader market again on a relative basis. For now though we are watching the financials for clues to the broader market’s next move.   

All of this action is exciting for sure, but profitable only if you can match your investment/trading time horizon with the one in which these quick opportunities arise in. Quick traders need to pick their spots in this environment while investors are better off selling in to rallies.

• See Sam Collins’ Daily Market Outlook: Can This Market Manage a Rally?
• See Sam Collins’ Trade of the Day: Get Out of This Semi Stock Now
• See Serge Berger’s Trade of the Day: Fast Trade in TXN Could Pay Off