The S&P 500 Index jumped on Friday, closing up 1.66%, to hit a new record. The move was triggered by two catalysts: US President Joseph Biden pledging on Thursday to double the US vaccination rate to 200 million within his first 100 days in office, and the Fed removing share buyback and dividend restrictions from banks.
The administration's actions clearly show it's committed to moving away from the pandemic as quickly as possible. The Fed’s activity signals implicit confidence in the country's economic recovery. Both infused traders with optimism.
However, a new risk is weighing on sentiment this morning—the potential repercussions from the liquidation of possibly as much as $30 billion worth of equity positions, when an over-leveraged, family-held investment fund in the US was hit with margin calls. Global banks Credit Suisse (NYSE:CS) and Nomura Holdings (NYSE:NMR) could incur serious losses too, as the fund is a client of each.
The supply-demand balance on Friday clearly supported demand, completing a pattern that's been almost two weeks in the making. This means that, as long as today’s uncertainty doesn’t push the price below the pattern, the odds favor a continued rally for the broad index.
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The index provided an upside breakout to a falling flag. The presumed dynamics of such a range is the space where buyers who enjoyed up to a 7% gain within just 8 sessions are cashing out, causing the flag to “fall.” The congested nature of the range demonstrates that demand is slowly absorbing the sudden excess of supply. At the same time, the upside breakout signals all available supply has been fully absorbed and this newfound demand is hungry for more, even at higher prices.
The move up is expected to trigger a series of market mechanics, which include a potential combination of a short squeeze and triggered longs, followed by speculators who join the move. When the short squeeze is over we can expect a possible pullback, which would retest investors’ ongoing interest.
If the demand holds, the SPX should repeat the move that preceded the flag.
Note: We are dealing with probabilities, not prophecy. The slow overall advance since Nov. 30 could potentially top out. Therefore, follow the clues we identified but don't take anything for granted.
Trading Strategies
Conservative traders should wait for the pattern to survive today’s jitters, with a close above the psychologically significant 4,000 benchmark, followed by a dip that verifies support.
Moderate traders would buy the dip.
Aggressive traders could go long at will, as long as they accept the higher risk that goes with beating the market, which may wait for further confirmation or even identification. Money management is crucial.
Here’s an example:
Trade Sample
- Entry: 3,950
- Stop-Loss: 3,900
- Risk: 50 points
- Target: 4,150
- Reward: 200 points
- Risk:Reward Ratio 1:4
Author's Note: This is just a sample. Even if our analysis is correct, the market may change. And even if the market follows through, the sample may still fail. Finally, even if the sample stands, it may fail you, personally. Your timing, budget and temperament will have a substantial impact on your trading success. Until you learn how to customize a plan, take small risks for the purpose of learning and gaining experience, not for quick profit, or you’ll rapidly be out of the game, blaming everyone but yourself.