Price Action Trading and a Break Down of the Probabilities for the SP500

Price Action Trading and a Break Down of the Probabilities for the SP500

Unfortunately, there is not much I can say about the next week. Most of the markets are continuing their panic movement. In such circumstances, forecasting is not something we should do.

In Crude Oil is too early to look for buy signals. The fall down might continue. The Commercials began their buying but very weak. Actually, the next pullback up might present a selling opportunity. But in the current global situation, such an opportunity would be visible when it is happening. We must monitor this market closely.

Sugar is in the same situation falling as was discussed many times here. Bonds continue their panic uptrend. Looks like a short opportunity in the Euro currency might present itself this week but such a signal would need a lower short-term high. If/when it happens we'll have to judge the quality of the signal


Let's focus on the US stock market. Look at the next chart.

Recession probability in USA

It shows the probability of a recession in the United States as it updated every week here. This time it is a little bit different. I've tried to measure further worsening of the global economy because of the coronavirus spreading. After adding those negative effects the recession probability hit 51%. Between 50% and 70% is the warning zone. That doesn't mean the recession is here or will strike for sure. It just brings a warning that we must be careful especially with taking naked positions. See the current reading of the recession indicator here.

Speaking of positions with global central banks cutting interest rates and the preparation of more stimuli, we can expect a bounce here.

Russell 2000 made a new low but the other three major indices held above their bottoms.

US Stock Market Indices

The S&P500 is on its way to make a higher short-term low. Creating it would suggest an up move. The problem is that this signal is not backed by anything else. 

From the price action perspective, the probabilities are distributed as follows:

  • 62% is the chance that we could see an initial move on Monday towards 2930
  • 43% is the probability to break below Friday's low (2898)
  • if such breakout occurs in 78% we could expect Monday to be a down day
  • almost 49% is the probability that Monday price action will break Friday's high
  • if the breakout above Friday's high occurs in 53% of the similar cases, the S&P500 closed above the breakout level
  • more probabilities and price action patterns can be found inside the Pieces

As you can see a buy signal is possible, but it is not strong at all. We need something additional to strengthen the signal.

Looking at the Wall Street Weekend chart we see that most probably Monday will begin with a gap down.

IG's Wall Street Weekend index

A gap down could create a stronger buy signal if the market can make it back to Friday's high and break above it. 

Now, let's find your missing piece!

Vassil Banov,
Founder of Piece of Trading

Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer

Charts made with TradeStation®.

TAGS: S&P500, SPY, SPX, Federal Reserve, COT, Commitments of Traders, Russell2000, Price Action Trading, Sugar, Crude Oil, Recession Indicator, Bonds, Euro

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