Every market has a story. And every story has a good and a bad, each helping to push the plot in different directions.
Until now, the story in the stock market has been simple: How soon will lockdowns end? In that story, vaccines were the good guys, beating the bad guys, the global COVID-19 pandemic. But now the story has shifted.
The current story is whether inflation will help or harm the economy. In that scenario, reflation is the right man – when prices rise as a result of escalating demand in a growing economy. The bad guy is fast-rising inflation, which, should it materialize, would wipe out the economic recovery.
Note that both the good and the bad operate within a framework where an end to lockdowns and a reopening economy are always a given. Which, of course, suggests that whatever the pandemic issues are, the story takes for granted that the health crisis is coming to an end. (Of course it would always be wise to stay alert for unexpected plot twists, but that's a whole different story).
Whatever the denouement of any of the scenarios, lockdowns seem to be disappearing. When that idea initially emerged, after vaccines were first introduced, the tech sector suffered as investors took profits on stocks that took advantage of the stay-at-home environment.
With the economic reopening looking even more likely, technology stocks, as embodied in futures in the marketplace, are expected to decline.
NASDAQ futures completed an H&S summit, a pattern that ends an uptrend and the start of a new trend. To clarify, this is on the short-term chart.
The daily chart's trend remains upward, as indicated by the upward line below it, at 13,100. Therefore, we have no evidence of a major turnaround on this point, rather a correction to return to sustainable progress.
Of course, support can fail and contracts, as well as their underlying assets, can peak.
Trading Strategies
Conservative traders should avoid this trade as it goes against the main trend.
Moderate traders would retest the integrity of the cartridge shortly after the completion of a return movement.
Aggressive traders could go short at will after writing a trading plan that includes both risk and reward and that they deem acceptable.
Here's an example:
Trade Sample
Entry level: 13,500
Stop-loss: 13,550
Risk: 50 points
Goal: 13,250
Reward: 250 points
Risk: Reward Ratio: 1: 5
Author's Note: This is an example only, meaning it is not the only truth, even if the analysis is correct. And it can be completely wrong. Either way, it means that a trading plan is just as important, if not more so, than the actual analysis. It is imperative to trade with a plan that suits your personal needs such as timing, budget and temperament. Take small risks until you learn to deal with the pitfalls.
