3 Reasons For Stocks To Fall Starting In May 2020 [Updated]
This article is an update of the one written on May 1st 2020.
After a record-setting sell-off in the markets that drove equities deep into bear-market territory, prices spent the last four or five weeks staging a record-setting rally – one that hasn’t been seen since 1987.
But, it might be nearing the time to let the fat lady sing.
There are three reasons driving my outlook for this:
REASON #1: Seasonality.
There is a well defined seasonal tendency for weakness in the US stock markets between the months of May and October.
REASON #2: Trend
We’re still in a down-trend. Despite this massive rally, prices are still below the 200 period moving average and major resistance points have not been exceeded yet.
REASON #3: Chart Resistance
Lets take a look at our charts…
The weekly chart is sporting a well defined and massive rectangle. Depending on where you want to draw the beginning point, the rectangle is between 2 and 3 years in the making.
The rally over the last four weeks have simply taken us back to the upper end of it – and into major resistance.
The rally also has taken on the shape of a rising wedge channel on the daily charts.
The combination of the two patterns have given us an interesting and potentially lucrative short trade setup.
The trade itself is pretty simple – we’ll use our basic breakout strategy. Wait for the first bar to close outside the lower trend-line and enter on the close of that bar. Place a stop above any bar that is inside the wedge and higher than our entry price.
The target, frankly, should be a full retest of the lows.
The risk-reward of this trade is one that you should be salivating over!
If it sets up properly.
But its also possible that it doesn’t trigger since the rising channel projects a rally to 3100 as well. As long as we’re inside the channel we should give the long side the benefit of the doubt. You can only get aggressive on the short side when the channel breaks.
WHAT IF IT DOESN’T WORK?
It is possible the trade itself gets stopped out while the thesis behind the trade remains sound. If that happens, we’ll simply have to find another entry point or retry the trade if the wedge pattern is still intact. The original trade from the original article on May 1st triggered once already and got stopped out after being nicely in the green for a bit. So we should take at most two more attempts to catch this next down-wave. There’s still enough profit to be made that it would be worth taking a few swings at it if it comes to that.
Stocks looking strong but ready to break?
Photograph provided by shutterstock.com
Hold your horses, be patient and let the trade come to you. With three independent and unrelated signals coming together this has the potential to be a good trade. But no matter how good a trade might look, don’t forget risk-control basics – enter your stop and respect it when it triggers!
PS: don’t forget – if you have questions about the techniques used in this article, a simple 1 hour technical analysis coaching session can get all your questions answered!