If you’re an aggressive trader and you’ve been waiting to short the broad stock market, then today is probably not a bad day to do so – especially if stocks open higher this morning.
So far, the pre-FOMC trading pattern has played out quite well. We got weakness in the stock market Friday and Monday, and we got strength yesterday.
That strength has pushed the S&P 500 back up to the 2440 level, and it has relieved the oversold condition on the NASDAQ Composite Index. So, if the market is indeed transitioning from bullish to bearish, then this is about where the bounce should end.
Yesterday, I wrote that we couldn’t rule out the S&P 500 rallying one more time up to the 2440 area. And that’s exactly what happened. Take a look…
Following yesterday’s rally, the index is bumping into the resistance line on the chart. And the negative divergence on the MACD momentum indicator and Relative Strength Index (RSI) still exists.
Aggressive traders can look to short the S&P right here around the 2440 level – with a tight stop at 2445 and a downside target of the 50-day moving average (MA) line at about 2390.
The NASDAQ Composite Index also looks like a good short sale candidate.
The NASDAQ sold off hard last Friday and Monday. The decline was the largest drop we’ve seen in that index since the “Trump rally” began. There’s a good chance this index has already made a significant intermediate-term top. So, yesterday’s NASDAQ rally back up to its 9-day exponential moving average (EMA) provides a good, lower-risk short selling setup.
Take a look…
Aggressive traders could short the NASDAQ Composite Index right here at 6220 with a tight stop on a close above its 9-day EMA at 6233, and a downside target of the 50-day MA at 6070.
Of course, there’s risk to shorting the market indexes. We’ve seen plenty of false breakdowns in the stock market over the past several months. Just when it looked like stocks were ready to roll over and start a deep correction, buyers showed up and pushed the market higher.
But the charts for both the S&P 500 and the NASDAQ Composite index look vulnerable to a drop right here. And they have obvious resistance levels that, if broken to the upside, traders can keep a tight stop and limit their losses if the market resumes its rally.
As far as short selling setups go, these two look pretty good.
Best regards and good trading,