October 30, 2018
Posted 9:30 AM ET - Yesterday we saw another opening gap higher and another fade. Stocks have been in a bearish pattern of higher opens and lower closes. This will be a busy week of economic releases and traders will be monitoring global growth. Domestic activity is robust, but Europe is struggling and emerging markets are also soft. China's official PMI will be released overnight and we might see weakness ahead of proposed tariffs. The selling pressure has been heavy and this slide will be hard to reverse. I've been outlining three things that could spark a bounce. The key word is “bounce”. I'm no longer looking for a rebound and a test of the all-time high in 2018. The FOMC will release a statement a week from tomorrow and we need a dovish tone. Any hint that the December rate hike might be postponed would spark buying. That announcement will come the day after the November elections. Betting odds suggest that Republicans will gain a seat or two in the Senate, but they will lose the majority in the House by a few seats. This scenario would not spark a massive market decline, but it would soften the backdrop. If the GOP maintains control of Congress the market will rally. The best case scenario would be dovish Fed comments and a GOP victory. Even then I believe the market will not challenge the high of the year. The US and China are headed for a nasty trade war. The meeting between Trump and Xi during the G20 meeting at the end of November is tenuous. Both leaders want to demonstrate that they have the upper hand. Bloomberg reported that many companies are already shifting supplies away from China to avoid tariffs and that might bear out in the PMI overnight. A trade deal with the EU is unlikely anytime soon. The membership is fragmented and the bureaucratic red tape is unprecedented. After three years they can't reach a decision on Brexit. Members like Italy are defying the EU and they propose to run big deficits in 2019. The EU is very dysfunctional. If Mexico does not stop immigration through its country it will jeopardize the US trade agreement. Domestic economic activity is strong. Last week Q3 GDP came in at 3.5%. ADP, ISM manufacturing, ISM services and the jobs report are on deck this week. In a week the market will know the election results and the Fed’s intentions. Swing traders should remain sidelined until we know the results. Day traders should look for an opportunity to short near the open. The selling pressure has been extremely heavy and every little rally has been faded. Use the first hour range as your guide. One of these days we are likely to get some positive news and the market could rally just as easily. Once the intraday momentum has been established the market continues in that direction. The 14 point S&P 500 pre-open gains this morning have vaporized and it looks like we are going to probe for support right out of the gate. . .
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