Trading position (short-term; our opinion): long positions at market (that's 2495 at the moment of publication) (100% position size) with stop-loss level at 2380 and the binding take-profit target at 2570.
Going into yesterday's trading, the S&P 500 could have shown some signs of life. After all, the pace of selling pressure looked to have abated with Friday's encouraging reversal into the closing bell. But after a meek attempt to narrow the sizable gap at yesterday's open, the bulls threw in the towel, and stocks endured another bloodbath. The overnight 100 point rally also fizzled out. Is all hope lost now?
Let's start with the weekly chart to see the shape of things this very moment (charts courtesy of http://stockcharts.com).
The bears clearly continue holding the reins, and the volume so far appears roughly in line with preceding week's one. This means that the move lower has legs. But does it mean that stocks will move in a straight line down?
Not at all. Please note that they're trading at the December 2018 support right now, bouncing back and forth. Earlier today, they have broken below yesterday's lows only to trade at around 2460 as we speak.
Let's examine the daily chart next.
Yesterday's plunge took stocks well below their Thursday and Friday lows, be they closing or intraday. The daily indicators maintain their very extended posture. While that's no guarantee of a stock rebound, another relief rally might be due in short order.
Let's quote from our today's Gold & Silver Trading Alert:
(...) we would like to draw your attention to the specific pattern in the daily candlesticks.
The S&P 500 futures are posting lower intraday lows, but the pace at which it declines overall, has slowed down compared to previous days.
Given all the similarities (as discussed yesterday) to 2008, did we see something similar back then, and if so, what happened next?
We did. Just before the sizable corrective upswing. This indicates that the stock market is likely to correct upwards anytime soon.
There are also three big non-market factors that make it even more likely.
First, the Fed's interest rate decision is tomorrow, and it could be the case that the Fed pumps even more liquidity into the system.
Second, which is related to the first point, is that just after the Fed's major surprising move, the market declined anyway... Which makes the Fed look... Well, stupid. The officials don't like to look stupid, and Fed's credibility is of utmost importance, especially now when they have used most of their bullets. This means that the Powers That Be will likely use whatever trick they could to make the stock market rally. Perhaps by asking their investment banker friends to start buying stocks (or maybe they will be rather "persuading" them than "asking"). Or perhaps short-selling will be banned... Which brings us to the third point.
Third, the short-selling is already being banned in Europe. Quoting from Reuters:
France, Italy and Spain are introducing curbs on stock market trading on Tuesday, banning short-selling to shield some of Europe's biggest companies from a sell-off triggered by the coronavirus.
France is banning short-selling on 92 stocks, the financial markets authority said as it tries to calm market turmoil. Belgium also took a similar step.
The Powers That Be desperately want to stop the declines and... We think they will succeed. But only for a while.
That's certainly food for thought.
But how to play the current setup? In our opinion, it's worth to position ourselves in advance, and with modest expectations. The priority is capital preservation and a favorable risk-reward ratio. See the reasoning and detailed plan of this very short-term trade within the Trading position section.
Summing up, the bears remain firmly in control, and they have confirmed it with yesterday's powerful downswing. The potential for a (temporary) reversal looms large though, and in the trading position details, you'll find our game plan for the hours ahead of yesterday's Fed meeting.
Trading position (short-term; our opinion): long positions at market (that's 2495 at the moment of publication) (100% position size) with stop-loss level at 2380 and the binding take-profit target at 2570.
Thank you.
Monica Kingsley
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care
