On Tuesday, the S&P 500 Index plunged, down 1.63% at the close. It was the worst performance for the broad US benchmark since May.
The index was pressured by increasing fears that members of Congress will fail to reach an agreement on raising the federal debt limit in order to avoid a government shutdown in October, an event that would have serious consequences for both the overall US economy and financial markets. During testimony yesterday in front of US lawmakers, both Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen warned Congress that a default would, according to Yellen be "disasterous," and would cause a "financial crisis and calamity."
Yesterday's SPX drop could perhaps bring the completion of a bearish pattern. It also confirmed additional bearish indicators currently in view, ahead of October, historically the most volatile month of the year for equity markets.
The S&P 500 fell to its lowest point since July 20, completing a H&S top. The price found support above the 100 DMA, after violating that of the 50 DMA.
The latter moving average has been the de facto uptrend line since April, following the famous March bottom of 2020. Will the uptrend slow its rate of ascent by switching to the 100 DMA? Or might conditions get even worse, such that the 100 DMA will fail to maintain support and the price will fall to the 200 DMA?
The H&S top’s implied downward move is roughly 3.5%, which would take the benchmark below the 100 DMA, signaling the 200 DMA could be 'in play.'
Trading Strategies
Conservative traders should wait for the price to close below the Sept. 20 low, to absorb all demand, then wait for a return move to retest the pattern’s integrity.
Moderate traders could wait for the same filter to avoid a bear trap, as well as the corrective rally, but for a closer entry, if not for added resistance confirmation.
Aggressive traders would short at will, provided they understand and accept the higher risk, proportionate to the higher reward of not waiting for further confirmations, in order to beat the rest of the market.
Trade Sample
- Entry: 4415
- Stop-Loss: 4465
- Risk: 50 points
- Target: 4215
- Reward: 200 points
- Risk:Reward Ratio: 1:4
Author's Note: The above is just a sample, not the full analysis. That’s in the body of the text. The sample is meant to show how to create a basic plan, not provide an all-encompassing trading strategy. You need to develop plans according to a strategy that fits your budget, style and timing. Until you learn how to do that, feel free to use our samples, but for educational purposes only. If you hope to make money right off the bat you'll neither learn how to build a plan nor make money. That's guaranteed—and no money back.