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US 500 - Potential Shorting Opportunity

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I want to share an article that shares my views and supports it. That does not mean anyone should believe it blindly or even think it is very credible. Everyone can judge and assess the credibility for themselves. 

S&P 500 could fall 40% as yield curve inverts, says analyst of one of 2018’s best hedge-fund returns

https://www.marketwatch.com/story/sp-500-could-fall-40-as-yield-curve-inverts-says-analyst-of-one-of-2018s-best-hedge-fund-returns-2019-03-22

For anyone who found this article interesting then I would recommend my Bonds and Gilts thread here on the IG Community.

One can also link my Potential Long Gold Trade thread and see how they are all connected in a 'Marvel type' Universe where there are 'Easter Eggs' being presented to us in the way of market (economic) news, politics, price action, etc. 

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The S&P 500 price has breached its 20 DMA on the downside. We have seen this a few times but it has continued upwards. 

I would like to see it breach its 50 DMA on the downside before seriously considering any 'short' trade. Yes it would mean missing out on some returns if the price does not go upwards from here. Right now the price could just as easily continue moving upwards should there be any positive news released by the media.

151544543_US500_20190325_05_27.png.58a2d8e68aa8f6dc7bd7a4ed9e583b29.png

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So far I must say that Elle has been bang on the money here in terms of how the US indices are playing out. 

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I do wonder if we may witness further positive prices in US indices for the remainder of the year? I do not know the answer to this. 

To try and offer a more balanced view with a counter argument against the title of this thread I thought I would share the article below. 

S&P 500 notches best start to a year since 1998, Dow rises more than 200 points on trade optimism

https://www.cnbc.com/2019/03/29/stock-market-us-china-trade-talks-in-focus-on-wall-street.html

 

 

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I think the key price levels are the 52 week highs for the Dow, S&P and Nasdaq. If these can be breached then it will be  extremely positive for these indices. If they cannot then there remains the potential of a large correction. For now one must not fight the price action or even try and trade against the trend. There are no confirmations of a trend reversal and no indicators suggesting that a short trade is on for any of these three indices right now. This could change with the Dow leading the way downwards but that trend confirmation signal is not there yet. 

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The US indices just keep rising and rising. The Nasdaq 100 seems the closest to its 52 week high and seems to be leading the way with the Dow and S&P following its path.

What happens when all three meet this point is going to be absolutely fascinating. 

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Well the Nasdaq 100 (US 100) is touching distance in making a new 52 week high. I include the chart below to illustrate this point.

953281485_USTech100_20190417_19_13.thumb.png.8922ccc9abf6a42b3f3a4b42300529b3.png

The question is that will this move bump into resistance or push on higher? Will there be a big drop or major correction? These are the interesting things that we are all about to find out. 

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I think any bad news released by the media could trigger some serious selling.

If good news is released by the media then new highs could be made and a new future created by the price action of the Dow, S&P and Nasdaq. 

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The question I am being asked is whether Gold is worth investing / trading (long) due to the recent sell off?

My answer is that I simply do not know. Based on the current trend and price action Gold could easily continue downwards in which case any price today could get a lot lower. 

For me there is still the inherent risk that Gold could go towards its 200 DMA on the 'daily'. This could mean further downside but one will have to monitor the price action to find out. There is no magic answer or crystal ball prediction. None of us can tell the future. 

1069031898_SpotGold_20190419_08_22.thumb.png.cccde0148bb121e1ca57efcf245d8776.png

Timing in relation to entry and exit points can be very important. One must remember you are not going to get into a trade at the lowest price point to go long and sell at the highest price point unless you have magical and mystical powers. 

One must set your timeframe that you wish to trade. One must trade with the trend and not against it. One must trade based on current price action. As you can see from the chart above that the current price action is downwards which to me means 'short' trade. This could change very quickly but there is nothing on the chart above that tells me to go 'long' right now. 

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Nasdaq 100 has made a new 52 week high. 

Will the S&P 500 and Dow Jones follow suit?

The price action on all three will be very interesting over the coming days and weeks.

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Well just after 22 hours from my previous post it seems the S&P 500 has followed suit. The Nasdaq 100 is making new higher highs. The Dow should in theory catch up and make a new high shortly. After that it is anyone's guess what happens next. 

 

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One important thing to remember is that upwards trends can last a lot longer than one envisages. 

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Posted (edited)
1 hour ago, TrendFollower said:

One important thing to remember is that upwards trends can last a lot longer than one envisages. 

🤣

S&P 500 has been up constantly since 26 December.

 

Edited by dmedin

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@dmedin,

It sure has. The trend has been strong during the past quarter. 

I tried to short the S&P 500 before Christmas but got my timing very wrong and certainly did not anticipate the type of uptrend we have witnessed. I made a loss on that trade which is no surprise but I did have a winning position that was getting stronger.

The reason why I set this thread up was to share a live trade with the IG Community. If you go back to the beginning you will see my rationale behind the trade and the motive of sharing will come across. I wanted to share a live trade with the IG Community and I shared this and also a long trade on Gold which is on a different thread.

A lot of people post comments, links to websites or articles, charts, charts with lots of lines, but I wanted to actually share live trades with the IG Community. It was not important whether it was a successful trade or not. In my case my long Gold trade was successful and my short S&P trade was not. The key was the mechanism via the IG Community to be able to share live real time trades. 

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As the price rises on all three of the major US indices does this increase the potential shorting opportunity when it does eventually manifest itself? This drop may take a while but it will come. It may be due to bad economic news, political mayhem, war, recessions, poor economic forecasts and results, etc.

At the moment the only trade is 'Long' on all three of the Dow Jones, S&P and Nasdaq based on current price action.

Do others on the IG Community think that the longer this trend upwards continues then the greater the fall will be downwards?

I would be interested in hearing the thoughts of others on this.

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The Dow still has not made new highs where as the S&P and Nasdaq have. 

It seems that market strategists from the likes of CNBC (whom I do not pay too much attention to) are suggesting that the markets will make new highs including the Dow but will then fall. I am not being funny but I could make suggestions, assumptions or predictions like that. They have a 33.3% chance of being right as the US markets are going to either go UP, go DOWN or go SIDEWAYS. There is no other movement they can make. By predicting they will go up and then go down is rather amusing as they are saying up when it is currently in an uptrend. What goes up must come down as that is they way markets work with profit taking, etc. So then they are stating the markets will go down. They all must be geniuses! LOL 😁

 

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S&P 500 apparently will rally around May 10 when a trade deal is announced (U.S. - China).

The current rally looks really weak.  It is really struggling to sustain a 'higher high' above 2950. 

It does actually look like it could be in for a drop in the near future but I wouldn't short it myself.

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@dmedin,

From a 'Trend Following' perspective one would wait for it to start dropping and certain indicators signalling a confirmed trend change before going 'short' so that you are trading with the bearish trend downwards. Of course this still does not rule out a sharp trend reversal or false trend confirmation. 

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Now the question here is whether the S&P 500 presents the potential of a possible shorting opportunity or not?

Now it could merely be a pullback / correction before the next leg or there may really be a big short coming. I will be totally honest. I simply do not know. 

So what does the price action and technicals tell us?

The price action is supported by volume (selling) at the chart below highlights. 

1019743882_US500_20190511_14_32.png.17f57cdf3339a3ffb6f2630c84738f28.png

The price is currently trading below the 'Parabolic SAR' which indicates bearish price action and a potential of a trend reversal. I do not think we are quite there yet. I include the chart below to highlight. this. 

1977196285_US500_20190511_14_33.png.c32d0f459ba53cc5d6dc92f4d03b9900.png

When looking at moving averages on the 'daily' then the price is trading below its 20 DMA and is close to trading below its 50 DMA. It is possible that the price could look to hit its 100 DMA and then 200 DMA which could indicate a possible retrace back to $2800 and $2750 levels. I include the chart below just to highlight this.

1198320447_US500_20190511_14_37.png.bf122c4f9bd3c491de626ccdc108808b.png

There may be a more shorter term 'short' opportunity here for the S&P 500 but more longer term I am not so sure yet. There could be a continuation of the rally after this correction. 

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Posted (edited)

If it drops below 2815 then it will be a 'failed inverse head and shoulders', not good.  OTOH if it bounces off 2815 then it's a good sign.

sp.jpg

Edited by dmedin

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Just to point out @dmedin that for the structure to be an inverse H&S price would have needed to have approached the pattern from the upside heading down (not just a few bars) to make a longer term bottoming pattern. But you are correct to point out that 2800 is an important level, as I inferred in the indices thread the bounce up off what was key resistance looks like 2800 has turned into key support.

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We are now witnessing 'Round 2' of the potential shorting opportunity not just for the US 500 but for Wall Street and the US 100. In other words, the Dow Jones, S&P 500 and Nasdaq 100. 

The Dow Jones's price has gone below its 20, 50, 100 and 200 DMA which is a strong indicator and signal in itself. I attach the 'daily' chart below to illustrate this.

1569776763_WallStreet_20190513_18.45-2.png.737a8d431883b1c136f5496394228c74.png

The 'Parabolic SAR' is supporting a possible shorting opportunity for the S&P 500 as the current price is below the dots showing a bearish reaction and also the potential of a trend reversal (at least for now anyway). I include the chart below to support this point.

87077156_US500_20190513_18_46.png.6c812b5e8424d2766a606b28125f2402.png

Now just look at the red bars support the bearish price action for the Nasdaq 100 in the chart I attach below to demonstrate this point.

1780492816_USTech100_20190513_18_48.png.50d5eb3fb598831c51115ccd04c52a2e.png

There is not just a potential shorting opportunity in the three major US indices but also indices such as the FTSE and those in Germany, Japan, France, Hong Kong and basically all the major indices around the world. 

The key is to exit the short position on the trend reversal back upwards and to take the profits. You can always re-enter again and again and apply the 'rinse and repeat' cycle should volatility make these trades extremely choppy and difficult to hold. Also the volatility could trigger stop losses which means one must think carefully about how they apply their stop loss management to the 'short' trades.

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All three of the US indices are showing a short term downward bias. The most important question is how much downward price action is remaining? I do not know and technical analysis cannot predict the future accurately for me.

The US indices could continue downwards which could present a potential shorting opportunity. This would be the second one since I started this thread but it could only be a short term trading opportunity for the short trade.  

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There is a potential shorting opportunity on not just the S&P 500 or US indices but all major indices around the world. The key is to get in as early as possible and ensure you get out once the trend reverses. 

The S&P 500 is below its 20 and 50 DMA which is enough for some to initiate a short trade. If you wait any longer then you find that you have missed most of the move downwards. Those traders who have a higher risk appetite would have gone short after the 20 DMA was crossed on the 'daily'. There is not a massive gap between the two. The 100 DMA is being approached. 

There is little point in waiting after the event. I got in too late on the last big drop when I started this thread and even though I initially was profitable and the trade was going great the big correction came quick and fast. 

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I'm not sure on the value of 20, 50 and 100 SMAs for the indices.  20 catches changes in trends far too slowly.  The rally in S&P 500 that started on Boxing Day for example (see below), only clearly shows up on a more sensitive time frame.  What is your opinion on MAs?

sp500.jpg

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@dmedin,

I do use 'Moving Averages'. What I have learnt over time and as my 'risk tolerance' has increased is that there are times when you enter as early as possible using the 20 DMA as if you do not and the trend is quick (may be sharp) then you seem to miss the move and opportunity to profit. Technical indicators are lagging indicators so they show us a signal after the price has reacted. 

So let me ask you, if you were looking to short this US indices then what indicators / signals would you use in your trading system to execute a trade? I use several indicators. Price action is the key metric I am monitoring. I will look at volume, I will look at moving averages, I will look at Parabolic SAR, I will look at momentum, I will look at RSI, etc. I will use numerous (but not too many) to aid me in my decision making process. 

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@dmedin,

I am not too worried about making the wrong call as if you sit on the sidelines and wait for the near perfect trade then there is only so much profit you can achieve. You have to be able to identify trending assets in different asset classes and trade them using a trading system that works for you. If you merely sit on the sidelines waiting for the perfect indicator to be hit or an Elliot Wave to play out then the chances are you have missed the majority of the move and then decide either not to trade or the trend goes against you pretty quickly or goes against the technical analysis theory you are using. 

Price action is the key. Yes there is a speculative element and assumption based element to my trading but this has helped me in the past catch some big trends and moves whilst others are sitting on the sidelines and posting on IG Community all day long! Yes, I will get trades wrong and make losses along the way but that is part of trading.

The key is to ensure that your winning trades make you more profits than your losing trades. Even if you win on 3 trades and lose on 7 trades out of 10 trades in say a month. 

I accept this strategy is not for everyone and you need a certain type of personality to adopt such a strategy but it meets my personality. I spend a lot of time monitoring price action and seeing how the price is behaving and reacting over different asset classes and will pull the trigger when my signals and indicators are met. 

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Posted (edited)

 

1 hour ago, TrendFollower said:

@dmedin,

I do use 'Moving Averages'. What I have learnt over time and as my 'risk tolerance' has increased is that there are times when you enter as early as possible using the 20 DMA as if you do not and the trend is quick (may be sharp) then you seem to miss the move and opportunity to profit. Technical indicators are lagging indicators so they show us a signal after the price has reacted. 

So let me ask you, if you were looking to short this US indices then what indicators / signals would you use in your trading system to execute a trade? I use several indicators. Price action is the key metric I am monitoring. I will look at volume, I will look at moving averages, I will look at Parabolic SAR, I will look at momentum, I will look at RSI, etc. I will use numerous (but not too many) to aid me in my decision making process. 

 

Looking back in hindsight, I wish that I had recognized that the Boxing Day rally and subsequent pullback were the start of a new uptrend.  This would also have been confirmed with a 5 SMA (weekly) > 20 SMA (monthly) crossover.  I would then have stayed long all this time, perhaps gradually raising my stop loss now and then.  I might have sold when the 5 MA dipped below the 20 MA but then gone long again when it went up.

sp500.thumb.jpg.bc0eadd443b5ffd5271b94f7bd9a3ff5.jpglongermas.thumb.jpg.871617fdc834e79ac05d30c87fd166fb.jpg

I could just be taking nonsense, because MAs are always obvious and easy to see 'after the fact'. 

I like the idea of Parabolics in combination with Directional Movement.  In this case there a couple of little whipsaws.  Bollinger bands, I need to read more on as I have not been using them.

parab.jpg

Edited by dmedin

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