These are perhaps the most uncertain times since WWII for the economy and the market. Because of coronavirus, the economy is screeching to a standstill as people are quarantined and businesses close.
The effect on markets has been dire: stocks and commodities have crashed, investors are rushing headlong into bonds causing yields to drop, and for many the future looks grim. Still, since markets don’t move in a straight line, savvy investors willing to take risks can still find profitable opportunities.
For those with the right temperament, the current conditions could enable the kind of profit that would normally take years to achieve, albeit in a very short amount of time. After correctly calling this selloff, we’re seeing the chance for a solid, short-term long.
This morning, contracts on the S&P 500 index triggered the 5% limit-up, only to then erase all the gains. We think there’s now a window in which to ride another potential bounce higher.
Why do we think prices will rise again? The chart tells the story, helping us forecast both rallies and declines.
S&P 500 Weekly Chart
This virus-related rout has wiped out all of 2019’s gains. An additional 2% drop would also erase the advance since 2017. This low between the two dates provides the ideal jumping-off point for a powerful rally that will most likely get many thinking that the massive global fiscal and monetary easing policies are doing the trick.
They would be wrong.
Still, the rally could be convincing. Meaning there’s room to enjoy a wild ride up, so long as you get off ahead of the peak.
S&P 500 Daily Chart
The red, falling channel is a projection of where the S&P 500 is likely headed. It also provides upward targets. Nonetheless, it’s important to remember that this is a countertrend move, which make it risky, and that prices may never reach the top of the falling channel.
Conservative traders do not trade against the trend.
Moderate traders may insist on waiting for consolidation before the rally, though that would be at the expense of the move.
Aggressive traders may risk a long position, with a stop-loss below yesterday’s low.
- Entry: 2,386
- Stop-Loss: 2,286
- Risk: 100 points
- Target: 2,686
- Reward: 300 points
- Risk-Reward Ratio: 1:3
Note: This is just a trade sample. It is only intended to emphasize the salient points of a coherent trade. It is not right for everyone, and not every trade wins.