Will Recycled Trade News Push the Market Through Resistance?

Posted 9:30 AM ET - A week ago the market showed some signs of strain when it quickly backed off of major horizontal resistance at SPY $281. Friday we gapped up to that resistance level again after the MSCI index announced that it will quadruple its holdings in Chinese stocks. The market reversed during the morning and the gains were erased. End-of-month/beginning-of-month fund buying attracted buyers and the market closed near the high of the day. Horizontal resistance will be tested again this morning and the S&P 500 is up 10 points before the open. Sources feel that a trade deal might be formalized before the end of the month and that Trump and Xi will meet sometime around March 27th. The Wall Street Journal reported that China would step up purchases of US products and that it would lower tariffs and restrictions on other products (agriculture, chemical, auto and other). The US would remove most (if not all) sanctions against Chinese imports. China is also considering a 3% reduction in its value added tax (VAT). A deal would certainly put pressure on Europe and I am expecting a tariff “tweet” in the next few weeks that sets another deadline. The EU is very fragmented and negotiations will drag on just like Brexit. A trade deal with China is largely priced into the market, but stocks have momentum and buyers will not worry about valuation until they see a soft patch in US economic data. Last week the Chicago PMI and GDP came in better than expected. ISM manufacturing was light (54.2), but still at a healthy level. Tomorrow ISM services will be posted and that is an important number. ADP, the Beige Book and the jobs report will also be released this week. Greek debt was upgraded two notches and improving credit is always good for the market. Europe has been very weak and Italy is officially in a recession. Germany barely stayed above that level. Negotiations with England are at a standstill and EU officials will not extend the deadline unless they are certain that the UK Parliament has an internal agreement. Theresa May is trying to avoid a train wreck and she only has three weeks to work a miracle. Central banks are prepared to backstop trillions of dollars of derivatives contracts. Manufacturers are moving production and inventory out of the UK. The Fed has been much more dovish than they were two months ago, but they still expect to hike one more times this year. The market is not pricing in any rate hikes and investors expect the balance sheet roll-off to end this year. Good news is priced in and I believe that any surprise favors the downside. With the market moving higher the Fed will tighten. Their policy is driven by the stock market and they want to push interest rates back to normal levels. Earnings season was excellent, but stocks are trading near the upper end of their valuation range. Swing traders should remain in cash. If global economic conditions stabilize stocks will compress at this level and we will buy a breakout. A hard exit for England is not priced in and economic activity in Japan, Europe and China has been slipping. I am going to error on the side of caution and I still sense that a drop is coming. Another month will provide clarity and some of the issues I've been mentioning will be resolved. Until then, the downside risks outweigh the upside rewards. Day traders should watch the early action. SPY $281 is a critical resistance level and now it represents support. It will be tested early after a gap higher and sellers will check the strength of the bid. Watch for a possible reversal like we had Friday. In the chat room we shorted that drop and we bought the low. This was one of the better trading days we've seen in the last month. The price action was steady and orderly. Perhaps we will a similar opportunity today. If the market rallies back above SPY $281 you should favor the long side today. Use SPY 281 as your guide today. . .

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