🧐 ProPicks AI October update is out now! See which stocks made the listPick Stocks with AI

Chart Of The Day: S&P 500 Technicals Signal Move Higher, But New Risk Looms

Published 03/29/2021, 09:26 AM
US500
-
NMR
-
CS
-

The S&P 500 Index jumped on Friday, closing up 1.66%, to hit a new record. The move was triggered by two catalysts: US President Joseph Biden pledging on Thursday to double the US vaccination rate to 200 million within his first 100 days in office, and the Fed removing share buyback and dividend restrictions from banks.

The administration's actions clearly show it's committed to moving away from the pandemic as quickly as possible. The Fed’s activity signals implicit confidence in the country's economic recovery. Both infused traders with optimism.

However, a new risk is weighing on sentiment this morning—the potential repercussions from the liquidation of possibly as much as $30 billion worth of equity positions, when an over-leveraged, family-held investment fund in the US was hit with margin calls. Global banks Credit Suisse (NYSE:CS) and Nomura Holdings (NYSE:NMR) could incur serious losses too, as the fund is a client of each.

The supply-demand balance on Friday clearly supported demand, completing a pattern that's been almost two weeks in the making. This means that, as long as today’s uncertainty doesn’t push the price below the pattern, the odds favor a continued rally for the broad index.

SPX Daily

Chart powered by TradingView

The index provided an upside breakout to a falling flag. The presumed dynamics of such a range is the space where buyers who enjoyed up to a 7% gain within just 8 sessions are cashing out, causing the flag to “fall.” The congested nature of the range demonstrates that demand is slowly absorbing the sudden excess of supply. At the same time, the upside breakout signals all available supply has been fully absorbed and this newfound demand is hungry for more, even at higher prices.

The move up is expected to trigger a series of market mechanics, which include a potential combination of a short squeeze and triggered longs, followed by speculators who join the move. When the short squeeze is over we can expect a possible pullback, which would retest investors’ ongoing interest.

If the demand holds, the SPX should repeat the move that preceded the flag.

Note: We are dealing with probabilities, not prophecy. The slow overall advance since Nov. 30 could potentially top out. Therefore, follow the clues we identified but don't take anything for granted.

Trading Strategies

Conservative traders should wait for the pattern to survive today’s jitters, with a close above the psychologically significant 4,000 benchmark, followed by a dip that verifies support.

Moderate traders would buy the dip.

Aggressive traders could go long at will, as long as they accept the higher risk that goes with beating the market, which may wait for further confirmation or even identification. Money management is crucial.

Here’s an example:

Trade Sample

  • Entry: 3,950
  • Stop-Loss: 3,900
  • Risk: 50 points
  • Target: 4,150
  • Reward: 200 points
  • Risk:Reward Ratio 1:4

Author's Note: This is just a sample. Even if our analysis is correct, the market may change. And even if the market follows through, the sample may still fail. Finally, even if the sample stands, it may fail you, personally. Your timing, budget and temperament will have a substantial impact on your trading success. Until you learn how to customize a plan, take small risks for the purpose of learning and gaining experience, not for quick profit, or you’ll rapidly be out of the game, blaming everyone but yourself.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.