The biggest theme in the markets this year is the post-pandemic recovery after the most catastrophic economic disruption in modern history. Even during the Second World War, the economy did not stop. On the contrary, it created jobs, and a lot of them.
More specifically, the issue is identifying the forces that will drive the recovery. Will there be inflation or not? If so, will it slow down the growth rate or not? Or will inflation actually exacerbate growth, as rising prices will allow companies to grow faster, in turn creating more and better paying jobs?
Market analysts around the world have different opinions. So we do not assume that we will give an opinion. We will only discuss supply and demand of stocks that will be affected by the recovery.
There are industries that gain more during economic expansion, and there are those that benefit from economic contraction. To this end, market sectors are roughly divided into two segments: growth stocks that perform better during contraction and value stocks that yield superior returns on expansion.
The stocks that gave investors the best results during the lockdown were predominantly technology stocks, especially the larger stocks. Companies that underperformed during the same period were value stocks.
In recent months, the market has been moving back and forth in "reflation trading", which benefits value or cyclical stocks – stocks that perform better when the economy picks up.
We believe that reflation trade is about to step back in favor of growth stocks.
Best represents the reflation trade as it includes many US domestic companies that suffered significantly during the coronavirus blockade and therefore the best value as the economy reopens and returns to business.
This year, the small cap benchmark gained 13.9% YTD. On the other hand, the tech heavy, which tended to negatively correlate with the Russell 2000, rose just 6.3% YTD.
Now let's see what that looks like on the map.
The small cap index is up more than 50% from its October low to its March high, the top of a V&G peak. When the index fell for March 5, almost to its previous low of January 29, it signaled that problems were emerging.
The next peak was only a 1.75% increase before the index fell again. to within 0.7% of the previous March low. Then the alarm went off as the price peaked on April 29, at a lower level than the previous peak on March 15, disrupting the rising peak-and-trough formation. But again, the price fell to May 12, within 1.5% of the previous low recorded on March 25.
This pattern shows that demand runs on vapors. If the price falls below the pattern's neckline – which will soon meet the rising trendline supported by the 200 DMA – it will complete a bearish pattern since the bottom of 2020. This pattern is likely to trigger a chain reaction of discontinued long and short positions that will push the price even lower.
Of course we don't know that the price will cause a downward breakthrough. The index could blow out the pattern, reversing positions forcefully and catapulting higher. Indeed, the MACD has issued a buy signal. While the RSI provided negative divergence, the momentum between February and March, against the rising price, tested the possibility of crossing the downtrend line.
That's why we're basically saying that when the V&G pattern is complete, it will be a strong bearish signal.
Trading Strategies – Set Short Position
Conservative traders must wait for the pattern to complete so that the price falls below the uptrend and the 200 DMA, followed by a corrective rally that finds resistance.
Moderate traders would also wait for the price to clear all supports, perhaps even wait for a return movement for better participation, if not further confirmation of the offer.
Aggressive traders could fall short at will, following a trading plan suited to their timing, budget, and temperament.
Here are three examples:
Trade Sample – Fast Trade within Patter n
Entry level: 2,250
Stop-loss: 2,260
Risk: 10 points
Target: 2,200
Reward: 50 points
Risk: Reward Ratio: 1: 5
Trade Sample – Longer Trade Inside Cartridge
Entry level: 2,300
Stop-Loss: 2.325
Risk: 25 points
Target: 2,200
Reward: 100 points
Risk: Reward Ratio: 1: 4
Trade Sample – Longest Transaction Including Breakout
Entry level: 2,300
Stop-Loss: 2.325
Risk: 25 points
Target: 2,000
Reward: 300 points
Risk: Reward Ratio: 1:12
