The broad stock market is rallying strongly again today, apparently buoyed by positive news on the COVID vaccine. Despite the rally, the DOW is still well below its Jan. 21 high (31,272). The S&P 500 and NASDAQ are also below their recent highs, although the NASDAQ is getting very close to its high (13,723 on Jan. 25). The S&P 500 is testing a stop loss point I suggested for our short trade last week (3,842), but more importantly, we are not seeing all three indices making new highs. Our current reversal zone lasts through the end of this week, and most likely also into next Tuesday. In other words, there is still time for this market to make new highs for a top in this reversal zone. We want to be shorting this market (which we have done); the only question is whether or not the tops are in already or will be made this week (or early next week). Note that the tops may be in for one or two of our indices, but not all three.
Our short position in the S&P 500 is currently slightly above the point where we made the trade (about 1% in the red). Traders may put an automatic stop loss for this trade at a level above this point based on their loss tolerance, keeping in mind that until all three indices break to new highs, the market is most likely still in a bearish correction. My stop loss suggestion last week was 3,842, but now I would raise that a bit to 3,871, assuming the other two indices also make new all-time highs. In the DOW, there is a lot of resistance around 30,820. Today this index broke above there briefly but closed below, which is bearish. A clear break above 30,820 would be bullish. The reward/risk ratio for our short trade is relatively high as a substantial correction in these indices is now due.
Holding my short position in the S&P 500 with a tight stop loss.