The past two days are a representative example of the herd mentality that has been plaguing markets. Yesterday, stocks rose on a supposedly dovish Fed as reflected in the July meeting minutes. Today, global stocks came to a halt, because of the same minutes.
As such, the S&P 500 Index is likely to head lower, after the market flip-flop on the Fed’s position on monetary policy.
Yesterday’s narrative was that the Fed has shown willingness to cut interest rates further if needed. Today’s theme focused on the deep divide among Fed members and the explicit statement that the recent cut should not be viewed as a policy change.
S&P 500 Futures are down, and despite yesterday’s exuberance, the price was suppressed by supply.
The S&P 500’s advance Wednesday was quelled by the bottom of a rising flag, bearish following the 6.5% plunge in as little as four sessions, from July 31 to Aug. 5. A bearish flag rises, as bears take profit. As demand is drowned out, bears lower bids to find more willing buyers, completing the pattern.
Note, that despite the week’s bullishness, the bearish flag’s integrity held — along with the broken uptrend since the December bottom — suggesting a sufficiently powerful bearish presence.
Additionally, while the index pulled back from the downside breakout, it created a pennant shaped consolidation, also a continuation pattern, bearish after the previous decline.
Trading Strategies – Short Position
Conservative traders would wait for a fall below the 200 DMA as a filter after completing a descending series of peaks and troughs.
Moderate traders may short upon the completion of the pennant.
Aggressive traders may short now, relying on the triple resistance of the flag bottom, the broken uptrend line and the pennant top.
Trade Sample
- Entry: 2,921
- Stop-Loss: 2,931 – Aug. 19 high
- Risk: 10 points
- Target: 2,891
- Reward: 30 points
- Risk:Reward Ratio: 1:3