A Decent Start

So far, the reversal at strong resistance at the monthly middle band and the main support/resistance trendline from the 2009 low is proceeding as expected. Monday was bullish as expected, there are high quality double tops formed on SPX/ES, NDX/NQ and INDU/YM. Yesterday there was a decent rejection from Monday’s highs and today, leaning 61.9% bearish, would be a good opportunity to confirm yesterday’s slight closing break below the SPX daily middle band.

The next two weeks lean bearish, with strongly bearish leaning days today, Thursday 11th May, Wednesday & Thursday 17th & 18th May before we see the next strongly bullish leaning day on Thursday 25th May. This is a good time for SPX to turn down and do some significant damage to the downside. The key to the day in my view is whether the weekly and monthly pivots, both currently at 4130 can be converted to resistance today. If we see that and the daily middle band breaks with any confidence, then the path to the downside will be open.

SPX monthly chart:

SPX closed slightly below the daily middle band yesterday, though the 4 handle close under the middle band at 4123.54 was not a clear break. We’ll see if that follows through to the downside today. .

SPX daily BBs chart:

If we see a sustained break below last week’s low at 4049.35, then the alternate double top targets on SPX would be 3930 or 3910. That would put SPX within striking distance of the larger double top support at 3808.86.

SPX 15min chart:

If we see a sustained break below last week’s low at 12724.20, then the alternate double top targets on NDX would be 12250 or 12150. That would put NDX within striking distance of the larger double top support at 11695.40.

NDX 15min chart:

If we see a sustained break below last week’s low at 33.2k then the alternate double top targets on INDU would be 32.4k or 32.2k. That would put INDU within striking distance of the larger double top support at 31.4k.

INDU 15min chart:

In the short term I think the odds are 75%+ that SPX is topping out short term for at least a decent retracement, and we now have topping patterns and negative divergence. The stats for today are 61.9% bearish, which is the most bearish leaning day this week, subject of course to the wild card of the Fed meeting today. Is there a chance that SPX will break up over resistance here instead of failing? Always, every good setup can always fail and go the other way, and I have assigned a probability of 25% to that, though in practical terms I think the odds of that would be more like 15% to 20%.

I set up a modestly sized model trade for the next few months and am following it here. I entered that with 9x MES (micro-ES) just before the close on Friday at 4190. 10x MES is equivalent to 1x ES, so this isn’t a large trade, but I’m planning to trade around it on the way down.

The entry was at 4190, the target is at 3430, 760 handles below. The stop for the trade is 70 handles above at 4260 (at which point SPX would likely be breaking up), so the risk/reward ratio is slightly over 1:10, though if the trade needs to be rolled that will likely reduce a bit below that. Max risk on the trade is $3,150, and if taken off at target without the need to roll the trade will yield $34,200. I will consider taking a third off near the 3940 and 3690 areas if seen, and perhaps adding them back on after any subsequent rallies. We’ll see how that goes, but at the time of writing this trade is currently up about 45 handles.

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Written by:

Richard Chappell

Jack is a 20 year retail trading veteran and co-founder of The Art Of Chart. He started his blog at channelsandpatterns.net in 2010 and since has published tens of thousands of charts looking at hundreds of trading instruments across most tradeable markets, doing original work mainly in the areas of trendlines, patterns and divergences. At The Art Of Chart Jack has taught trading skills, technical analysis, and the discipline and trader psychology that allow those to be used effectively in trading.

03rd May 2023

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