Chart Of The Day: S&P 500 Bears Capitulate, Bulls To Push Prices Higher

US stocks rose on Monday and regional shares followed today after traders' inflation concerns were calmed by comments from FOMC members and China began clamping down on speculation in commodities. The S&P 500 opened higher and closed up 1%, rising for the third out of four days.

Investor risk-appetite picked up after the Chinese government's decision to threaten industry leaders with severe penalties for excessive speculation and misinformation in the commodity market persuaded traders that any inflation as a result of a spike in commodity prices will temper. Regulators in the Asian nation have put in place a five-year plan to keep prices under control.

Then Federal officials put the spark back in traders’ eyes by reiterating that the current data is not indicative of the kind of inflation that would upend an economic recovery. Although Federal Reserve Governor Lael Brainard, Atlanta Fed President Raphael Bostic and St Louis’s James Bullard each concede that as the economy reopens, soaring demand will disrupt supply chains and probably increase prices in the next few months, they believe the current jump in inflation is transient as pent up demand will temper and prices will return to equilibrium. 

The news sent yields on the 10-year Treasury note lower for the fifth straight day, the biggest decline on a weekly basis since September 2020. Yields had been surging due to rising inflation which caused an equity selloff. With inflation-related worries easing, technicals are signaling the supply-demand balance is shifting toward buyers.

The price has completed a falling wedge, bullish after the 10% surge in the 6 weeks between Mar. 24 and May 7. Sellers tried to force the price down, but when buyers refused to fall into line, they gave up, allowing demand to push the price past the supply-demand range.

This pattern signals a pause and is therefore considered a continuation pattern. That is, a successful completion with an upside breakout would indicate a resumption of the underlying uptrend.

Note, the wedge bottom, which was in the form of a hammer, provided a support precisely on the uptrend line since the 2020 bottom. It was joined by the 50 DMA. The Rate of Change (ROC) demonstrated that momentum is supporting prices, as it reversed.

Trading Strategies – Long Position Setup/h2

Conservative traders should wait for a new all-time high, followed by a dip that creates a base.

Moderate traders would wait for a pull-back for a better entry, if not for further support.

Aggressive traders could go long at will, provided they accept the higher risk of fewer confirmations that goes along with moving before the rest of the market. A coherent trade plan is paramount for trading success, especially for the more aggressive traders.

Here’s an example.

Trade Sample:

• Entry: 4,200
• Stop-Loss: 4,100
• Risk: 100 points
• Target: 4,500
• Reward: 300 points
• Risk:Reward Ratio: 1:3

Authors Note: This is a trade “sample,” suggesting there are diverse ways to approach this trade, even if our analysis is correct, and even if statistics will follow through favorably. You must learn how to customize a plan to your timing, budget and temperament. Till you learn how to do so, feel free to use our samples, for the purpose of learning, not profit. Or you’ll end up with neither. This is not a disclaimer. It’s a guarantee. Happy trading.

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Written By: Investing.com