Market Testing All-time High. Buy Puts If You See This Pattern

Posted 9:30 AM ET - The market is in a holding pattern and it is waiting for the next catalyst. Fed Chairman Powell will testify before Congress the next two days and his comments before the open sparked a 20 point S&P rally. The FOMC minutes will be released later today and the market expects a quarter point rate cut on July 31st (100% probability). This morning Powell said that there are many crosscurrents and traders took that as a sign that preemptive measures will be taken. Brexit, slowing global economic growth, tariff wars and the debt ceiling were cited as concerns. The Fed typically gives the market what it wants, but I'm skeptical. The Fed does not want to appear as if is caving into Trump’s demands and the market is at an all-time high with solid domestic economic growth. Global economic conditions are softening and I've been pointing this out for the last few months. China will post its trade numbers Friday and it will post GDP and industrial production Monday. These will be important numbers. If they are particularly weak, traders will assume that the PBOC will ease. I've heard rumors that if the Fed cuts rates the PBOC will as well. The market is addicted to easy money. As interest rates drop investors are forced out on the risk curve. They have to buy equities because bond yields are not keeping pace with inflation and bond investors lose purchasing power (negative returns). Apart from the US and China, the remaining central banks are out of bullets (0% interest rates). The market can move higher in this environment, but the downside risks are great. Earnings season will begin Monday and excellent results are priced in. Stocks are trading at the upper end of their valuation range (forward P/E of 17) and surprise favors the downside. If slowing economic growth starts to impact the bottom line investors will head to the sidelines. No one seems too concerned about the Fed's dovish stance. When they cut rates it will be to fend off slowing growth. The trade talks with China resumed and officials are "making progress" via phone conversations. I don't view this as a positive sign. The negotiations are so tenuous that it's not even worth their time to get in a plane to have face-to-face meetings. Both sides have made token gestures (Huawei concessions in exchange for grain purchases) to keep the conversations going. There will not be a trade deal with China before the 2020 election. The market will flirt with the high from last week, but the gains have been marginal. Resistance at SPY $300 should be firm. Swing traders should stay in cash. I don't like the backdrop and from a technical standpoint I am watching for a double top and a breakdown below SPY $295. If I see this pattern we will buy puts. Day traders should watch for early weakness. Gaps higher have been faded and the bid needs to be tested. If the early dip is brief and shallow you can buy a new high of the day. If the market gradually drifts lower and we make a new low after two hours, favor the short side. Fed speak is good for intraday volatility and we should see some price movement. Watch for China's numbers Friday and Monday. Weakness won't necessarily translate into a market decline (PBOC will ease), but it will be an indication of China's economic growth. . .

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