The S&P 500 index tumbled yesterday, the most in more than a month. The drop was led by Financials after slipping yields suggested that rates (which are the bread and butter of banks) would not rise more than at a gradual pace, confirming the recent Fed minutes. Another headwind to the financial sector is the European debt crisis which is threatening to spread to other parts of the globe.
More bad news also weighed on US markets when the the US blindsided China by announcing it was resuming its efforts to raise tariffs on Chinese imports, restrict sensitive US technology and shorten visas for some Chinese citizens, just ten days after Treasury Secretary Steven Mnuchin said that the US and China will put the trade war on hold.
China responded that it would defend itself, threatening a counter trade-based attack.
Yesterday’s worst one day fall in more than a month brought the index below the upper boundary of a symmetrical triangle, nearing the 50 DMA (green). However it closed well above the pattern.
The 200 DMA (red) rushed in to aid its 'lieutenant,' the 50 DMA. While the decline may be considered nothing more than a correction, as part of a return move after a breakout, with a 1.2 percent upside penetration, it satisfied only an aggressive filter in avoiding a bull trap.
In a previous post we discussed the potential of an upside breakout to a pennant. However, it failed. So how should traders proceed from here?
Trading Strategies – Long Position Setup
Conservative traders would wait for a decisive upside breakout, reaching a conservative, 3 percent penetration, prior to considering risking a long position.
Moderate traders may be satisfied with closing above the 2,740 May peak, as a sign that demand absorbed all the available supply at these levels, turning resistance into support.
Aggressive traders may enter a long now, providing they can afford a stop-loss below the 50 DMA at 2,670, which proved yesterday a support (alternatively, they may wait for a dip for a closer entry), or assume the risk of losing the position.