S&P 500
Dow Jones and the entire equity market simply levitates. On little or no volume, it simply squeezes higher ahead of the U.S. elections.
This is a dangerous time to be a bear, especially if we consider that the market so far showed a tremendous ability to recover from all the dips. However, considering the risk-reward ratio for the trade, bears might consider a short trade, albeit with a smaller position than usual.
This week’s main event from an election point of view was the debate between the two vice-presidents. Much more organized and disciplined, the debate brought into the media’s attention a…fly. It tells you much about how interesting the debate was and its impact on the stock market.
The President’s health took the headlines, especially considering that he was out of the hospital after only a few days of treatment. Could this be the bullish signal the markets waited for when it comes to the coronavirus?
A few things are worth mentioning here on the Dow Jones bearish setup. First, the market currently meets dynamic resistance. The resistance comes from the rising trendline that followed the price action since the initial dip in March and the bounce that follows.
Second, the Dow Jones broke the trendline, and not it is retesting it, in a pure-play of support becoming resistance. Most traders wait for such price action before entering a trade.
Third, on its way to retest the trendline, the price action formed a rising wedge, which is a bearish pattern. Therefore, three reasons to short the Dow Jones from a pure technical perspective.
But the most important one comes from the risk management. Bears would want to go short at 28,500 with a stop loss at 29,200 highs. That would be the risk. The take profit must be at the lowest point in the rising wedge formation. Effectively, it means a move back to 26,500 for a trade that respects an appropriate risk-reward ratio.
