Traders bid a new all-time high after announcing that Jerome Powell will be at the helm of the US Federal Reserve for a second term. Markets see continuity as a sign of stability.
But very quickly traders changed their minds. After the kneeling buy orders, they recalled that they viewed Powell as more aggressive than Lael Brainard, the alternative option and now the nominee vice president. So traders sold all-time highs for the Dow, limiting the day's gains. We argue that this extreme indecision can be a prelude to a summit.
Let's look at the graph.
On Tuesday, the Dow rose 0.55% after wiping out most of Monday's gains. Investors sold it when they changed their mind and decided Powell was not good for the stock market.
Was the original advance justified?
Note how the highs from the previous two sessions found resistance to the October spikes, which happened to form the left shoulder of a potential H&S peak.
In addition, the head of the cartridge forms a smaller H&S pattern. Yesterday's rebound marked a return to his neckline. The target of the smaller H&S top is below the neckline of the more oversized top, increasing the likelihood that the more elaborate reversal formation will end with a downward breakout below 35,600. Trading Strategies Conservative traders should wait for the downward penetration of at least 3% and one that lasts at least three days to avoid a bear trap. Then they waited for a corrective rally that would test the integrity of the pattern.
Moderate traders would also wait for the pattern to complete with a downside breakout, but will be content with a 2%, 2-day filter to avoid a whipsaw. They too would wait for a return move for better entry if not trend confirmation.
Aggressive traders can now short, relying on the smaller H&S target, provided they accept the higher risk associated with higher rewards when moving ahead of the rest of the market. Money management is critical.
Here is an example showing the basis points of a trading plan:
Trading example – Aggressive short position
Input: 35,800
Stop Loss: 36,000
Risk: 200 points
Target: 35,000
Reward: 800 points
Risk: Reward Ratio: 1:4
