We have been consistently bearish about stock markets for some time, due to unjustified valuations against the background of the worst economic data in 70 years, and warnings from the Fed – which were repeated yesterday – the IMF, the World Bank and a slew of money managers. Nevertheless, despite these fundamental and some technical factors, stocks have had the biggest rally in years.
Perhaps the current broad sale is also due to a new wave of COVID-19 infections in the US as lockdowns continue to weaken. . But the strongest rally in years has also taken place during the worst pandemic.
By the time the death rate per million peaked at 8.15 in the US on April 22, the number had increased by nearly 29% from March 23, when the death rate was only 0.17.
Yesterday, the Dow Jones completed its first consecutive decline in almost a month. However, let's not forget that the last two-day sale was followed by a rally, even though – a small H&S summit within a different bearish pattern – it was a rising wedge. Both patterns failed when market dynamics turned, leading to a short push and encouraging the bulls. That is why we are now making a bullish appeal for the short to medium term, where we see that prices are finally testing the record high in February again.
However, since the last two-day sale that ended March 13, the stock has surged nearly 21%, blowing out two innate bullish patterns and breaking the 200-DMA, as if it weren't even there, in the process. So for the time being, a relapse is needed as investors lock on profits and are waiting for a signal on where to go.
The upward gap of June 5 – the third stage higher in this movement that has taken place since the low of May 14 – is worrying. Think of it as a final, desperate attempt to stay higher. The problem is that when the demand dries up, there is no more support, causing traders to hang around awaiting any sale. This can be an island reversal setup complete with a down opening. However, if there is no falling gap and the index shows some accumulation above the failed rising wedge, convergence on this point with the 200 DMA will create a technical pressure point and we would expect the rally to continue.
The upward breakthrough of the rising wedge we have seen has taken place on the back of the growing volume. Notice how the volume is rounded and gradually decreases from those initial heavy levels to the low point. Now, with this recent outbreak, the volume is increasing again. The 20 DMA for volume was also breached for the first time in this recent stage. Likewise, the Advance-Decline also jumped with the price breakout and fell in line with the current sale.
On the other hand, RSI reaches a top after reaching an extremely overbought 86.6 and the ROC has foreseen a negative divergence. However, none of the momentum indicators have broken below the upward trendlines or earlier troughs. Therefore, if the price finds support above the falling wedge and these indicators remain above their previous lows, traders may see this as a point to take a long position.
Dow Jones hourly chart
Anyway, we expect at least a short-term withdrawal after the hour chart shows an hourly H&S peak completed, which has proven itself with a return movement after penetration didn't even last an hour
Trading Strategies
Conservative traders have to wait for confirmation of the support from the failed rising wedge, peaking at a new high above the June 8 price, and waiting for a slump.
Moderate traders can be content with risking a long position with a base above the rising wedge.
Aggressive traders are likely to follow a contrarian short depending on the hourly chart and the market's maturity for correction.
Trade Example – Aggressive, contrary short
Entry: 27,000
Stop-Loss: 27,200
Risk: 200 points
Target: 26,400
Reward: 600 points
Risk: reward ratio: 1: 3
