As September drew to a close, the Index posted a monthly loss of 4.7%, the worst decline for the same period since 2015, when the Index lost 5.1% of its value. However, when the benchmark fell to its lowest of 3,209.45 – exactly a week ago – it fell a staggering 8.3%, on track to deliver the worst results since the 8.6% losses in September 2011.
An abrupt realization by investors that megacap technology stocks were overvalued, triggering a comparison to the dotcom bubble, caused high-flying technology stocks to drop and weigh on the broader index. However, the same tech companies that flogged benchmarks were suddenly bargains at their lower levels, which seemed to justify pushing prices back up. In addition to market pressures, hopes for additional economic relief from a pandemic in the US are being raised again and again, the odds of which again seem optimistic today.
But although the S&P 500 climbed for the fourth of five days yesterday, the widely tracked benchmark closed its peak after Mnuchin said no final agreement had yet been reached.
However, the merchant consensus does not project optimism, this deal will actually materialize. Techniques projected by the price and its trading pattern indicate that the index is going down.
As noted above, yesterday's advance ended well after the day's highs. It did so after attempting to break a rising flag bearish after plunging 7% in just three sessions from September 3-8. Yesterday was the third day that the price fell away from the bottom of this bearish pattern.
The 50 DMA that joins the bottom of the flag underlines that it is a technical pressure point, where supply and demand converge. Wednesday's trading pattern developed a shooting star, a candlestick with a long upper shadow, charting how bears drove bulls back, a bearish indicator.
Combined, all this increases the chance that the current rally will lose momentum. Market mechanisms – a return after a breakout, after the initial explosive drop as demand dried up within the continuation pattern – crashed supply as sellers rushed to find new, willing buyers at lower prices. The return movement was presumably fueled by a short, along with short-term dip buyers, supplemented by hopeful bulls.
With the technical aspects of the move cleared up, resistance at the very bottom of the flag suggests that positions will continue to move with market dynamics, perhaps prematurely pricing in the ever-illusory stimulus package.
Trading Strategies – Short Position
Conservative traders would wait for a short, at another low, to create a down peak-valley formation regardless of the previous upward trend.
Moderate traders could risk a short with a close below the current week's price cluster, indicating that demand is running out and supply is shrinking.
Aggressive traders would go short at this point, after bulls failed to capture the flag yesterday, even after piercing this intraday base, causing them to withdraw, provided they have a trading plan they will follow. Here's an example:
Trade Sample
Imports: 3,365
Stop-Loss: 3,400
Risk: 35 points
Target: 3.225
Reward: 140
Risk: Reward Ratio: 1: 4
