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…

ANALYSIS

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 on the daily charts.

The combination of the two patterns have given us an interesting and potentially lucrative short trade setup.

THE TRADE

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. 

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.  It might take two or three attempts to catch this next down-wave.  But there’s enough profit to be made that it would be worth taking a few swings at it if it comes to that.