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Chart Of The Day: S&P 500 To 3,200

Published 07/20/2022, 09:40 AM
Updated 07/09/2023, 06:31 AM
US500
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  • Pendulum swings recession fears to optimism
  • But is it justified?
  • Maybe it is just a bear market rally
  • Optimism that this earnings season will demonstrate that corporates can grow profits even while inflation is at 40-year highs, and that the US Federal Reserve will not be as aggressive on interest rate hikes as initially feared has boosted equities.

    At least that is the narrative. But maybe it is suckering investors back into the market for a bull trap.

    How do I know this? Well, I don't. I'm just playing the odds.

    I know that bear markets have rallied, even some of the strongest rallies.

    I also understand that the market is still very much in a downtrend, nor have I identified a substantial bottom, which also requires a trend reversal, which has not happened.

    Let's see how these dynamics play out on the S&P 500 chart.

    S&P Daily

    The index broke through the top of a Symmetrical Triangle, a technical event disseminated on social media. However, a 0.8% penetration, making up a partial candle, is not a convincing breakout, the kind that would convince shorts to cover and trigger longs. I would need to see at least one long green candle cleared of the range to think the price blew out continuation pattern, bearish within a decline.

    Moreover, although the price is close above the 50 DMA, another event many technicians are touting, it's only barely done so, and more importantly, it's a falling 50 DMA, which isn't exceptionally bullish.

    Finally, the price did stop dead in its tracks below the falling trend line that connected the previous lows, which may be the neckline of a Downward Sloping H&S top.

    In other words, as far as I'm concerned, this is nothing more than a Return Move to retest the top, resulting from a short squeeze that pulled in hopeful bulls. The H&S implied target is about 3,400. The triangle's implied target is about 3,200. If I'm right, we have a ways to go before we could even think about looking for a bottom.

    Trading Strategies

    Conservative traders should wait for the symmetrical triangle to break the downside before risking a short position.

    Moderate traders would be content with a close back within the triangle.

    Aggressive traders could short now take advantage of an exceptional entry from a risk-reward perspective, as the price is right below the neckline.

    Trading Sample - Aggressive Short Position

    • Entry: 3,940
    • Stop-Loss: 4,000
    • Risk: 60 points
    • Target: 3,640
    • Reward: 300 points
    • Risk-Reward Ratio: 1:5

    Disclaimer: The author currently does not own any of the securities mentioned in this article.

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