Short Selling Opens Across Major Indices


Simpler Trading Team

Mar 08th 2022  .  4 min read

In this market with rapid changes in direction, Simpler’s traders are intently watching one index – the S&P 500 which represents 80% of the U.S. stock market.

The S&P 500 is revealing a pattern where current chart structure suggests selling bounces if resistance levels hold.

(Check out the video, above, for insight into trading this changing market.)

Checking chart analysis for short selling

A Fibonacci analysis of the high of the S&P 500 revealed a swing failure of the retracement level following the move up from the February low to the high that occurred last week. This week the level broke back below the 61.8% retracement, pushing the index back below the common swing failure support level.

Traders sometimes use this analysis when they anticipate an asset has a high probability of price action bouncing back in the direction of the initial trend.

This retracement lends to the argument that the index is headed back below the key low established last month. (All three major indices closed in the red after a volatile session today.)

Simpler’s traders are looking for opportunities for short trades on the downside when the S&P 500 makes a bounce higher on the way down. This is the process of selling “borrowed” stock at the current price in order to purchase the stock at a later date.

Watching daily, weekly charts to downside

While the technology-laden Nasdaq index has fallen 20% from its previous high and is in a bear market, the S&P 500 still has the potential to make its way back up to some previous price levels.

The S&P 500 can serve as a measure of the broader economy, while the Nasdaq reflects more on technology such as tech giants Apple, Google, and Microsoft.

The S&P 500 has a measurable amount of hedging activity built into it with aerospace defense industries, commodities, and energy that should provide the index the ability to bounce.

Throughout this active environment, Simpler’s traders watched the five-minute and daily charts that can show support levels across smaller time frames. When traders zoomed out to the weekly charts early this week, the high on the S&P 500 was almost the same as the prior low – and this is where the index seems to have found its footing.

Always keep in mind, especially in this environment, that when traders don’t scan the levels across the charts… they trade blind. 

Are computers driving price action?

Traders aren’t the only ones following all this market movement.

Price action alerts the institutional traders using artificial intelligence, or “algo bots,” to scan the charts and take action at key levels. This occurs with individual stocks as well as indices and bonds.

Computer algorithms – or artificial intelligence – are dominating the market at certain key levels. These levels are where traders tend to get railroaded if they are not aware of this influence.

Shorting the indexes can provide a hedge against downside risk, like recent market sessions. Short selling occurs when a trader believes an asset price will continue to decline. Shorting can be a risky trade, especially for those not yet skilled enough, as a fast loss is possible should the asset price reverse and climb higher.

The market has been swimming with short-sellers this week. This has Simpler’s traders watching for the potential for pullbacks in strong stocks that might set up a long trade.

Assets with a positive order flow – energy, chemicals, and agriculture – could open up some long trade possibilities in this downward-moving market.

Technical analysis supports trading strategies

Regardless of market direction, Simpler’s traders rely on key levels and technical analysis to support their trading strategies.

The team continues to look at price action and market sentiment to provide information for signals showing key support and resistance levels.

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