Calling 'risk-off' for next week on the S&P 500
It has been a week of “risk-on” where we saw equity markets rally. US 10-year yields, a traditional “risk-on” indicator, opened the week at 1.3629 and are currently at 1.5304, while gold traded lower to $1332/oz. As of the close on Thursday, July 14, the S&P 500 is up 1.24% for the week.
However, looking at the intraday action today, momentum of the S&P 500, as seen on a daily candle chart, has begun to decline, and the slow stochastics are within striking distance of a bearish crossover. The price action in the S&P 500 for today is eerily narrow, forming a Doji candle, a potential reversal pattern. Fundamentally, the S&P 500 has breached new highs, buoyed by the strong jobs report in June, even as the May numbers were revised lower. The US unemployment rate also ticked higher to 4.9%.
In view of the declining upside momentum, we are calling a short on the S&P 500.
Management and risk description
We can trade the S&P 500 contract via the US500 index tracker on the Saxo platforms. The contract trades 18:01 - 16:00 (22 hrs) Eastern Time.
In addition, we can minimise the risk of the trade through an entry stop order. The (daily) average true range of the US500 index tracker is approximately 20 points, thus a downward adjustment of more than 20 points would be suggestive of a downward correction in the US500.
Source: Saxo Bank
Entry: sell US500 via an entry stop order at 2140, GTC.
Stop: with no historical levels to derive support and resistance levels (the S&P 500 is at new highs), we base our stop on 2 x ATR, i.e. 2140 + 2(20) = 2180.
Target: when the Slow Stochastics next exhibit a bullish crossover, indicating that downside momentum has eased.
Time horizon: the latest upthrust in the S&P500 began on June 30, 2016, and therefore, we expect the lifespan of this trade to be 1-2 weeks.
Non-independent investment research disclaimer applies. Read more