Bull Trap on the US Stock Market…

By October 15, 2020 Market Analysis

Are we looking at a BULL TRAP on the US stock market?

Isn’t it bizarre how the US stock market is trading at record highs yet there are over 12 million US citizens unemployed? More major retailers have filed for bankruptcy in the first nine months of this year compared to the whole of 2019.

Furthermore, US mortgage delinquencies have jumped by nearly 4% which is the largest jump since the MBA’s (Mortgage Bankers Association) survey began. An estimated 4.2 million homeowners were on forbearance plans, as of June 28th.

You may have heard the saying, there is a disconnect between the economy and the stock market, and you would be correct in agreeing with the statement.

Markets are trading at record highs based on hopes of a second stimulus package. The mass stimulus from the FED and US government is resulting in a devaluation of the USD. The US printed more money in one month than in two centuries.

We are now questioning the strength of the recent recovery in the US stock market. 

Are we in a counter-rally/bull trap?

SP500 – Daily Charts

The SP500 is showing a rising channel formation/bear flag, keep in mind these ALWAYS break at some point. The new high is also setting up a potential bearish divergence on the RSI. The bearish divergence is generally what we look for when trading reversal opportunities.

DOW JONES – Daily Charts

There is a similar story being painted on the Dow Jones. A possible bearish divergence setting up along with a bear flag structure. Retail traders are being brought into the market on hopes of more stimulus. Technical patterns are always broken at some point, what we tend to find initially is a move higher beyond what the market is expecting. Which results in capitulation and a breakdown. Classic bull trap scenario.

The question we have to ask is how high will this go before the opportunity presents itself.

Next week there is a blockbuster week!

VIX Options/ Futures expiration on the 21st October

US Government vote on the next stimulus bill.

Presidential debate on the 22nd October

 

Firstly, the VIX is a measure of volatility. Leading into the expiration date traders will be looking to sell their positions or face cash delivery. This can increase volatility on the day. The market, which is hanging on stimulus hopes, will find out on Thursday if they receive any stimulus prior to the US elections and to top it all off, President Trump and Joe Biden face off again for another comical viewing.

The stimulus will have a direct impact on the USD and US indices.

DXY Index

We have been tracking the USD reversal pattern for some time, as you all have seen previous analysis.

There has been an inverted head and shoulders formation at the bottom of a 5 wave structure. The DXY is now setting up a potential bull flag structure. There is a clear inverse correlation between the US stock market and the DXY.

If the stimulus talks breakdown, we could see an explosion on the VIX, consequently pushing traders into the USD and sell US indices.

The technicals are there for everyone to see.

We just need the catalyst to start the movement. Technicals are ALWAYS broken, it is just a question of when.

Our sole focus in the trading floor is to take advantage of these setups over the coming week!

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