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Chart of the Day: S&P 500 Technicals, Stock Reversal of the Ahead Yield Curve Signal

After posting a new all-time high on Tuesday, the price fell on Wednesday, losing 0.5%. The move coincided with a as the note, representing shorter-term bets, soared while the longer-term benchmark bond moved with much less momentum.

Usually, longer-term bonds offer a higher yield to compensate for the longer wait that an investor has to put up with before receiving the principle.

However, yesterday short-term yields surged even as longer-term issues fell. This is a clear indication that investors are withdrawing their money from short-term notes, which increases these returns. When the prices of longer-term treasury bills are raised, their payment becomes relatively smaller compared to the investment, which is why their yields fall.

Presumably, investors shift their money into longer-term bonds to preserve their purchasing power in the face of the highest inflation in 30 years, as measured by the index. This is the Fed’s preferred measure of inflation because it excludes volatile food and energy prices.

The metric rose 0.3% in August, up 3.6%. September PCE data will be released tomorrow and a 0.2% gain is expected for the core measure.

This is the highest since May 1991, prompting Fed Chairman Jerome Powell to call the development “frustrating” after insisting for months that inflation was going to be transient.

Perhaps in anticipation, yesterday stock market investors shifted their funds from risky assets to safe havens.

Daily SPX

The broad benchmark supplemented an Evening Star, a three-session bearish pattern.

An evening star begins when a rally is still going strong. The bulls add a long green candle. The next day, the course extends the rally. However, there is a warning sign. The SPX only produced a small candle. On the one hand, it widened, supposedly showing momentum. However, it did not exceed its opening price. This could be a source of concern.

On the third day, Wednesday, the S&P index was unable to prolong the rally, falling instead. The image has gone from bullish to potentially bearish. Perhaps worse, when the price did not just drop from Tuesday’s advance but completely erased Monday’s gains, a powerful message of pessimism was sent. Looks like the bears are in control now.

Finally, the middle candle is either a shooting star or a high wave candle. Either is bearish, reinforcing signs that sellers are picking up the slack.

Yesterday the price found support from the previous peak of September 2. Will sufficient buying interest consider the fact that the price has passed it as a sign of a continuing uptrend? The rate of change (ROC) which measures momentum says no.

Trading strategies

Conservative traders should stay out of this trade, given that it reverses the uptrend.

Moderate traders Would consider a short sale if the index again tests the 4600 level and falls back, thus proving a continued oversupply.

Aggressive traders could sell at will, provided they accept the risk of matching the reward of moving ahead of the rest of the market. Act according to a coherent plan. Here is an example:

Sample Trade – Short Position

  • Entry: 4575
  • Stop-loss: 4600
  • Risk: 25 points
  • Target: 4,500
  • Reward: 75 points
  • Risk: Reward Ratio: 1: 3

Author’s Note: Trading is not fortune telling. On the contrary, it works the odds. Traders know there are ups and downs. Professionals know they don’t have to get excited either, but if they trust their strategy, they stay the course. The aim is to show stable and constant returns on a statistical basis. Until you learn how to write a plan that fits your budget, schedule and temperament, you can use our samples as long as you realize that they are only for your education, not for profit, or you will end up with neither. Guaranteed. And there is no money in return.