June 28, 2018
Posted 9:30 AM ET - Heated rhetoric between Trump and our global trading partners has investors on edge. The S&P 500 breached critical support at the 100-day MA and we are likely to see additional weakness today. China raised the stakes when it said that it would stop buying US treasuries. The S&P 500 is down 10 points before the open and we could see a nasty drop today. The bid has been resilient so far. Buyers don't believe that a full-blown trade war will happen. Trump has to worry about mid-term elections. A steep market drop would force him to soften his stance. If Democrats win the House his agenda will be dead in the water. China knows that he needs support from the heartland and agricultural tariffs will inflict pain on his most loyal constituents. Xi does not have to worry about elections or negative media. Yesterday we heard reports that North Korea is completing construction on its primary nuclear facility. There is no official agreement in place and Kim will continue this program so that he has some leverage. If China lifts its sanctions on North Korea Trump will lose his bargaining power. From a strategic standpoint Trump should have found middle ground with our largest trading partner. This would have kept pressure on North Korea and it would also pave the way for trade negotiations with other countries. He missed this opportunity and now he is at war with the world. The market does not like the current backdrop. Trump needs to tread very cautiously. His harsh tone could have been part of his negotiating strategy. He needed to know how far he could push China and that will help him identify middle ground. China also knows that he is not making blind threats. Trump did back off on his proposed takeover restrictions whereby Chinese companies could not acquire US technology companies that had strategic intellectual property. The market loved the news initially and we saw a nice bounce yesterday. That relief rally ended quickly and a full-blown reversal resulted. With this new knowledge he needs to quickly de-escalate and get China back to the table. These political crosswinds are making it very difficult to trade and Trump prides himself on being unpredictable. Major economic releases lie ahead and they should be strong. The news will be good, but not good enough to offset trade war concerns. Two weeks from now earnings season will begin. Profits will be robust and guidance will be strong. The market might not rally on the news, but it should be able to tread water. Swing traders are long IWM calls. We are going to hold this position without a stop. Be prepared to take some heat for another week or so. End of month fund buying, strong economic news and the start of earnings season will keep buyers engaged. If trade negotiations with China are suggested by the White House, the market will shoot higher. Trump's popularity is on the rise and he needs to maintain that momentum into November. Day traders should look for an opportunity to short the market early today. The action has a very negative feel to it. Once the dust settles, use the first hour high as your guide. If we are below it, favor the short side. If we are above the first hour high, favor the long side. If the market rallies above SPY $270 you can get more aggressive with your longs. Look for choppy trading with a negative bias the rest of the week. . .
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