US futures are rising at the time of writing and promise another day of rallies for the underlying indices when Wall Street opens later on Wednesday. When this happens, it would be the third consecutive day of gains for the, as well as the other major US benchmarks. In the current very uncertain market environment this is a remarkable achievement.
Even yesterday's warnings from two Fed members that (1) what has been done by the central bank so far is not enough, and (2) that the Federal Reserve doesn't really know if anything will be enough, since all this is nothing more than an "experiment", investor sentiment has not dampened. Nor does it have a possible flare-up of the American-Chinese trade tiff, if not a cold war, between the two strongest economies in the world.
Despite the wide range of headwinds, stock bulls remain intrepid. They have only slowed down their pace. But technicals could send a counter signal.
We recently noted that a bearish wedge (dotted line) formed on the benchmark index. Yesterday's rally completed a gravestone doji, a bearish trading pattern, although it didn't follow significant progress that would have sent a meaningful signal.
Nevertheless, if confirmed at a lower closing price, it would increase the chances that we have a small H&S peak development right under the feet of bulls, who remain hopeful that reopened economies may bring prices to record highs .
A completed H&S summit would confirm the previous bearish pattern, the goal of which is a bottom retest, the March low. And so many rides at that low point.
If it breaks, we will have a bona fide, long-term downward trend in our hands, with two peaks and two troughs in a downtrend, after falling for the second time since late March. Note that the low has never reached the bottom since the bottom of the ominous 2008 crash.
The Advance-Decline line found resistance at the 1.00 level, a proven support and resistance level since just before the bottom of March. The Advance-Decline line can also form its own H&S top.
Also, the 50 DMA crossed below a declining 200 DMA, causing a death cross, increasing the bearish implications amid the rising wedge progression as the price increased.
Trading Strategies
Conservative traders would wait for a new low to register below the March bottom, too short, or a new high above the February high , to buy.
Moderate traders can enter a short after completing the H&S Summit, below 2,700.
Aggressive traders may enter into a backward trade, shortening the rally, and count on the H&S summit as an ongoing bearish development after the rising wedge.
Trade sample
Entry: 2,900
Stop Loss: 3,000
Risk: 100 points
Target: 2500 – round psychological number and implicit target of H&S
Reward: 400 points
Risk: Reward Ratio: 1: 4
