May 4, 2018
Posted 10:00 AM ET - The market is fighting tooth and nail to hang onto major support. The S&P 500 rests just above the 200-day moving average and this support level is being tested with greater frequency. We have also seen a series of lower highs and a descending triangle is forming. That is a bearish technical pattern. If the SPY falls below $261 and it closes below that level for a few days it will set a negative tone for the rest of the summer. The FOMC statement was dovish Wednesday. That should have sparked buying and it did not. That was a major warning sign. Yesterday the S&P 500 fell below the 200-day moving average and the selling pressure accelerated quickly. A low was established early in the day and a sharp reversal pushed us back into positive territory. That price action would normally be very bullish and we should've seen follow-through buying in the afternoon. The market was able to tread water and a legitimate capitulation low would have resulted in follow-through buying today. The S&P 500 is down 10 points before the open suggesting that this was just a small oversold bounce. Potential trade wars with China, the EU and Mexico are weighing on the market. The delegation of negotiators will return from China today and most analysts believe that some progress will be made. An agreement will take time and Trump could play hard-ball. European steel tariffs have been postponed for a few weeks and the EU is threatening additional tariffs against the US. NAFTA appears to be close, but Trump wants Mexico to secure its side of the border. These winds are temporarily blowing in the right direction, but they can change quickly. The Iran nuclear deal is likely to be scrapped after Israeli intelligence demonstrated that they have been cheating since the agreement was signed. Europe wants to keep the deal in place with some major changes and if the US backs out it could make trade negotiations more difficult. China has put pressure on North Korea and they were instrumental in getting them to the table. China will use this as leverage in the trade negotiations. From my perspective the market needs time. In time the trade negotiations will be finalized, a Fed rate hike will have happened, economic growth will continue, inflation will moderate, the Mueller investigation will conclude and stocks will grow into their current valuations. This could take a few months to play out and the market will be poised to rally in the fall. Until then, we can expect knee-jerk reactions to pending news. Official PMI's were strong, ISM manufacturing and ISM services were a touch light, ADP was strong and the jobs report was a little light. Wages increased .2% and that will give the Fed more breathing room. Revenues in Q1 have increased 10% on average and profits are up 25% on average. These are excellent numbers. Swing traders can short the SPY below $260.50. Use $261.50 as an intraday stop. Buy the QQQ if it trades above $163.50 and stop the trade out if it closes below $163. This strategy indicates that the market could swing either way. I would use an intraday stop on the short side because a snap back rally could be violent at the lower end of the range. All it would take is a trade deal with China to spark buying. I don’t have the same concerns on the upside and I would use a stop on a closing basis. Day traders need to be mindful of key support levels. If the SPY is below the 200-day moving average I would favor the short side. Let the momentum establish itself and go with the flow. This is a low probability environment for swing trading, but it is great for day trading. These conditions will persist for a few months. . .
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