Yesterday, it fell by 1.57%, the sharpest decrease since 1 October, which means that all profits in 2020 will be canceled. The combination of a deadly virus – the potential damage to the economic leap that has recently been seen around the world – is still unknown – and the recent exuberant rally resulted in the sharp sell-off.
We think that the retreat is an exaggeration, given that "previous viral outbreaks around the world have not done a significant dent in economic and market performance …" However, we also believe that there is still room for correction .
The graph of the index has just activated two bearish signals.
Dow Daily Chart
Even if the Dow opens 0.3% higher, as futures suggest, it would still be below the broken uptrend line. Not only has the price fallen below its upward line since December 3, it has also fallen below its upward line since the bottom of October 3.
Note how the intraday high tried to climb while the longer upward line resisted its advance. Two mitigating factors, however, are the 50 DMA – monitoring the lows of December 31 – that supported the lows of the day and the closing price was the same as the opening price, creating a high-wave candle. The pattern of one session indicates a lack of certainty in the direction and often appears before inversions, which in this case would mean a rebound.
The RSI fell below its upward line since 1 October. In addition, it led to a negative divergence, which successfully mentioned the subsequent decline, as the momentum fell at a rising price between the highs of November 18 and January 17.
If the lows of December 28,375 fall to December 31, the meter is probably aimed at the 28,000 level – the broken resistance at the end of November, beginning of December. The next major support is 27,400: the low of December 2 that confirmed the support of the broken resistance of July and September
Trading Strategies
Conservative traders would either wait for a falling series of peaks and troughs – for a bona fide reversal, before risking a short position – or they would wait for new highs and then a correction that would stay above the upward line to join.
Moderate traders would wait until yesterday's high wave candle potential reversal signal was wiped out with a lower low, with a close-up below 28,375 levels – the December 31 lows – and then play the support resistance levels specified above.
Aggressive traders can take a long position in the very short term, counting on a temporary buying dip following yesterday's sharp decline and the news of today's global efforts to curb the virus outbreak before joining moderate traders with moderate a short, when finding resistance at the 28,800 level.
Trade sample – arrangement of short positions
Listing: 28,800
Stop loss: 29,000
Risk: 200 points
Target: 28,200
Reward: 600 points
Risk: reward ratio: 1: 3
