NAFTA Trade Deal Fuels Rally But Lots of Negative News In the Background

Posted 9:40 AM ET - The market needs a catalyst to move higher and it has one. Canada agreed to trade terms and NAFTA will be signed. Negotiations came down to the wire and the S&P 500 is up 15 points on the news. It will rally back above the breakout at SPY $291.45 this morning. I can't fully embrace the opening rally. It was questionable whether Trump had the authority to rescind NAFTA and to move ahead with Mexico. I also feel that a deal was expected. This opening rally could be an overreaction and there are a number of negative news releases this morning. Relations with China are deteriorating. To the dismay of China the US signed an arms agreement with Taiwan and US naval exercises have increased in the region. China canceled a security meeting with the US and it resents Trump's accusation that China is trying to influence our elections. Analysts will start price in 25% tariffs starting in 2019. The greatest threat to this market rally will come in the form of tariff related profit warnings. The market will be fine with all of the banter until companies disclose the potential impact on earnings. These warnings could start in the next few weeks. Italy's budget does not remotely conform to EU guidelines and they plan to run a huge deficit. The entire union is fragile and Brexit negotiations have not gone well. A US trade deal is very unlikely before year end. China's official PMI came in light. Government officials have warned media outlets not to report negative economic news. The PBOC stands ready to ease. The economic calendar is full this week. PMI's in general were little soft and this morning we will get ISM manufacturing. ADP, ISM services and the Unemployment Report will be posted this week. Domestic numbers have been excellent. A number of European nations plan to import oil from Iran after US sanctions are imposed. This will weaken our position and our relationships with those nations. Swing traders should use SPY $290 as an intraday stop. As long as the market is above that level we will stick with our position. Day traders should watch for a possible reversal early in the morning. If it is going to happen, the bid will start to crumble in the first 30 minutes of trading. If the market is able to hold $291.45 for the first two hours of trading it is likely to grind higher. I don't trust this rally. There are plenty of potential "landmines" and I don't see a catalyst. A trade deal with Canada was likely and this feels like an overreaction. I would prefer to get stopped out of our long position and I would like to see a nice drop down to SPY $287. Along the way I will be able to gauge the selling pressure and I can get much more aggressive with my longs once support is established. In short, ride this move and always have an intraday protective stop in place. The news will pick up this week so we should have good movement and volume. . .

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