We have witnessed an impressive rally in the US equities market these past 2 weeks, but rejection of important Fibonacci Retracement Level, a Doji Candlestick for Friday, overbought conditions and upcoming FED meeting are the main reasons why we believe that it is time for a pullback from the highs.
- Current Rally retraced more than 61% Fibonacci Retracement of November’s and December’s high, however S&P 500 failed to close above this important level, forming an ugly reversal candlestick in the form of a Doji, a red flag pointing to a possible trend change.
- As marked in the chart above, whenever Stochastic enters into overbought environment, it is time for a pullback from the highs, as happened in November’s and December’s high. In the same moment we are trading in the overbought levels with Stochastic signal lines crossing to indicate a possible trend reversal.
- There are only two important US economic calendar events scheduled for the week, today’s FOMC members’ speeches (Brainard, and Fisher), also scheduled for Wednesday Crude Oil Inventories, which has lately proven to be an important factor in directing trends to S&P.
Considering all of the above factors, it would be much safer playing on the short side as there is limited upside to the S&P index and futures given the important Fibonacci and Resistance levels. An ideal entry would be around these levels, with a Stop Loss Order in Friday’s High 2007.5, and Target (1): 1960.00- 1950.00 levels.
Even though there is much more downside to this instrument, we advise taking profits on the mentioned level because of support of Weighted Moving Average (WMA, 20 periods), also due to FED decision on interest rate which will definitely increase volatility in the markets, stopping traders on both sides.