This Chart Pattern Tells Us To Be Cautious With Swing Trades

October 17, 2019
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - The S&P 500 has been trapped in a 100-point range since April. Traders are constantly in "wait and see" mode and the focus is on pending news. Sometimes the release is tweeted, sometimes it is a scheduled release and sometimes the timeline postponed indefinitely. When the news hits the wires we get an explosive move that lasts for an hour and then the market compresses the rest of the day. There are many political cross-winds and they shift daily. Three out of the last four days have resulted in a doji formation where the close is the same as the open. The trading volume this week has been anemic and traders are waiting for the next news event. No one knows if the trade talks with China will bear fruit. Both sides are leaning towards a "mini deal" and that a formal agreement could be in place in a month. However, the Senate is going to vote on a bill that supports pro-democracy protests in Hong Kong and this could throw a wrench into the negotiations. To be honest, this is more of a cease-fire than it is a trade deal. As long as the trade relationship stays status quo the market will be able to tread water. All of the tariffs to this point have not mattered and the S&P 500 is within striking distance of the all-time high. US consumers are not paying highs higher prices, but Chinese consumers are. Speaking of swirling crosswinds, who knows what's going to happen with Brexit. I have read a dozen articles and some feel that progress is being made while others feel that it is dead in the water. The deadline is approaching and we will have an answer to this very soon… unless it gets postponed for the hundredth time. Brexit is a big deal if there is a hard exit. A trade deal with China is not as critical in my opinion. Earnings season is unfolding and the overnight news was good. I'm expecting a decent bid to the market until mega cap tech stocks have reported. That should last through the end of the month. At a forward P/E of 17 the market is trading at the upper end of its valuation range. The Fed is likely to ease if economic conditions deteriorate. The data points last week were soft and the FOMC meets in two weeks. Swing traders should manage profits on bullish put spreads. Hopefully some of them will expire tomorrow and you will be in cash. We will wait for the next dip and then we will reload. Depending on the political outcomes the market could swing either way. Many of these issues have been unresolved for over a year and the "can" might get kicked down the road again. We just need to be patient and wait for the next round of selling. The bid is very strong at the 200-day moving average and resistance is strong at the all-time high. Day traders should make sure that the opening gap higher holds. Buy stocks with relative strength once it is established. The market is above horizontal support at $294 and the 100-day MA so we have to favor the long side. Trump said that he expects to sign a deal with China in November so hopefully his tweets will be positive. I will be focusing on stocks that have gapped higher after posting strong results. Option Stalker has searches where we can view stocks that have posted in the last two weeks. Often the stock takes a day or two to get going after the number and this is a great way to find those gems. Horrible volume and dojis on the daily chart make this a low probability trading environment. Trim your size and your trade count. The next major economic news will hit the wires tomorrow when China releases industrial production, retail sales and GDP. I am expecting negative results due to a surprise liquidity injection by the PBOC yesterday. . . image

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