S&P 500 Futures attempted to claw back from their biggest daily drop since February 2018 on the worsening global coronavirus spread. However, the rebound lacked the stamina to go against an apparent worsening mood among investors and it edged further down still.
But even if futures turn around again or their underlying gauges pick up again, it may very well be too late and prove to be simply the trading pattern of a market top.
While in itself yesterday’s falling gap had no technical bearing, being a Common or Area Gap, the fact that it fell below the Jan. 22 peak above the 3,300 levels was the first current sign that the present uptrend may be unsustainable. The second sign that's relevant right now was when the price crossed below its uptrend line from the Oct. 3 low – which was reinforced with the 50 DMA.
We emphasize “current” and “right now” because we have reported bearish behavior multiple times, going back to at least late January, as the RSI and the MACD have been providing negative divergences.
Stocks may very well retest the 3,300 levels – as institutions divest in a measured manner to feed a rush that appears to be bargain hunting, but could possibly be proven to be a bull trap.
Trading Strategies
Conservative traders would wait for a return to the 3,300 levels, which would then be drowned out by supply, pushing it below the neckline — the lows since the last day of 2019 at the 3,200 levels. Wait for a minimum 3% penetration to diminish the likelihood of a bear trap, a return move to retest the neckline and then short.
Moderate traders would wait for the expected dead-cat bounce to 3,300 and short.
Aggressive traders are likely to risk a long position after yesterday’s panicked selloff that was halted at the support of the lows since Dec. 31.
Trade Sample