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Chart Of The Day: The S&P 500 Selloff Isn't Over Yet

By Investing.com (Pinchas Cohen/Investing.com)Stock MarketsMar 11, 2020 10:52AM ET
www.investing.com/analysis/chart-of-the-day-the-sp-500-selloff-is-not-over-200514984
Chart Of The Day: The S&P 500 Selloff Isn't Over Yet
By Investing.com (Pinchas Cohen/Investing.com)   |  Mar 11, 2020 10:52AM ET
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Supply and demand are rarely at equilibrium with the inherent fair value of an asset. The dynamics tend to overshoot what something should be worth until they reach an extreme, like a swinging pendulum that then gets pulled back to do the same in the opposite direction.

That's the condition of the S&P 500 Index right now, which makes it difficult to predict what may come next. However, when fundamentals are opaque, technical analysis can often add more clarity. The chart below helps illustrate the patterns that are forming — and these suggest that the current selloff isn't quite over yet. 

S&P 500 Daily Chart
S&P 500 Daily Chart

The balance of powers formed a rising flag, bearish after the preceding plunge, which we forecast would complete and extend the selloff. 

We expect U.S. President Donald Trump’s fiscal package — aimed at limiting the impact of the coronavirus outbreak —  if and when specifics are revealed, to provide the steam for a return move that would retest the rising flag, bearish following the preceding plummet.

If the pattern continues to play out its positional shifting, it may rally to retest the bearish pattern. It’s difficult to say how far such an advance would follow through, as anything can happen to shape the currently skittish, collective sentiment of investors.

We don’t expect such a return move would go past the 200 DMA, which was also the point of the downside breakout at the 3,050 level. But when the market is this volatile, it's not an exact science.

However, the broken uptrend line, the top of the pennant, below 3,200 should be the resistance of last resort, if this decline were to endure.

The technicals following extremely oversold conditions demonstrate that investors are ripe for a buying dip. But we expect it to be a corrective move within the downtrend that was established when the current bottom formed a second trough, completing a descending series of peaks and troughs.

Trading Strategies

Conservative traders would wait before entering a short for a full return move, till at least the 200 DMA and the point of downside breakout at the 3,050 level. They would then wait for evidence of secondary distribution, with at least one long, red candle closing lower than the preceding up day.

Moderate traders are likely to wait for the same corrective rally, but not wait for proof of trend. They would short when the price reached a resistance, with a stop-loss that fits their budget and trading style.

Aggressive traders may risk a contrarian, long position, counting on both fundamentals and technicals to fuel a likely return move on dip buying, and short covering on profit taking.

Trade Sample - Contrarian Long Position

  • Entry: 2,800
  • Stop-Loss: 2,750
  • Risk: 50 points
  • Target: 3,000
  • Reward: 200 points
  • Risk:Reward Ratio: 1:4
Chart Of The Day: The S&P 500 Selloff Isn't Over Yet
 

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Chart Of The Day: The S&P 500 Selloff Isn't Over Yet

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Comments (5)
cb cb
cb cb Mar 11, 2020 1:14PM ET
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Excellent suggestion! Your stop loss was bit as of 1 hour after your article. Buying the dip on the day WHO officially declared a world pandemic not the smartest move
Pinchas Cohen
Pinchas Cohen Mar 11, 2020 1:14PM ET
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The post was written before the WHO announcement, and the stop loss is a trade "sample" for contrarian, risk takers. Read the post, and the title.
cb cb
cb cb Mar 11, 2020 1:14PM ET
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Pinchas Cohen  I get your point and the title was spot on. My point however is that 1 - really bad timing with posting this article on the same day the pandemic was declared and 2 - really bad trade sample, a lower entry (2770 for example) and a stop loss at 2730 (yesterday's lows) would make more sense IMO.
Pinchas Cohen
Pinchas Cohen Mar 11, 2020 1:14PM ET
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It's a trade sample, just a sample, giving an example of what parameters to consider, not trading advice. It can't be good for all traders.
Heine Pedersen
Heine Pedersen Mar 11, 2020 11:51AM ET
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No it's not. Oil is sinking again. And yet, gold is getting hammered by WS. And it's short selling as different volume indicators show. Throw out your books and everything you learned about trading. "If our precious oil goes down, so does your precious metals.. Muwhahaha.."
Wojciech Cies
Wojciech Cies Mar 11, 2020 11:49AM ET
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Anybody trying to "buy this dip" for a medium - long term before we see the full scale of this epidemy in US must be crazy... US is 2-3 weeks before Europe on this crisis and has the worst healthcare system of all developed countries to handle a wide health crisis. US will see the death toll spike up in next two weeks followed by shutdown of economy as people self quarantine. But millions of people have zero savings and null social safety net and cannot survive without going to work...
Wojciech Cies
Wojciech Cies Mar 11, 2020 11:49AM ET
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I get it, people might try to play short swings. I'm talking those actually buying stocks now. It's a Russian roulette game
Jan Skilbrei
Jan Skilbrei Mar 11, 2020 11:02AM ET
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your example is too risky, who wants buy in front of fast spreading virus, better sell next breakdown, this can lead to a mini financial crisis
Pinchas Cohen
Pinchas Cohen Mar 11, 2020 11:02AM ET
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aggressive, contrarian traders.
Ashwin Shah
Gravity2020 Mar 11, 2020 11:00AM ET
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Long position? Omg that's inconceivable! It's gonna be a pure carnage today!
Pinchas Cohen
Pinchas Cohen Mar 11, 2020 11:00AM ET
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Long position for aggressive traders, taking a contrarian position. The other two positions are shorts.
Salvatore Improta
Salvatore Improta Mar 11, 2020 11:00AM ET
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Pinchas Cohen  Sono d'accordo, ma lo stop lo metto a 2710, e il target a 3040
 
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