May 2, 2018
Posted 9:30 AM ET - After a volatile start to the year the market is starting to settle into a range between the 200-day moving average and the 100-day moving average. Political news has temporarily died down and earnings are keeping a bid to the market. Valuations are little rich and stocks need time to grow into them. A number of headwinds will be resolved this summer and we can expect choppy price action. The biggest threat to the rally is a trade war. NAFTA should be signed this month, but Trump wants Mexico to secure its side of the border. Steel tariffs in the EU have been postponed until June and a US delegation is negotiating a trade deal in China. Billions of dollars are at stake and this process will take time. I'm expecting additional extensions and a friendly tone during the next few weeks. Trump has been known to "walk away from the table" and this threat will keep a lid on any rally. The Iran deal is likely to be revoked and that is priced into the market. Israel's intelligence report supports Trump's notion that Iran has been cheating ever since it signed the nuclear agreement. The US has allies in the region (Saudi Arabia, Egypt, Iraq, United Arab Emirates and Jordan) and I don't believe this will materially impact the market. We can expect economic sanctions to be imposed. Oil prices would move higher if we revoke the agreement. North Korea seems willing to denuclearize. China helped bring them to the table and I believe they will use that as leverage during the trade negotiations. This dark cloud seems to be parting, but you never know. Mueller's investigation continues and rumor has it he was looking to subpoena Trump in March. Political news has been driving the price action and investors are nervous. Valuations are stretched so there is room on the downside. The FOMC statement will be released today. Inflation is at the target (2%) so the Fed has breathing room. Most analysts believe that there will be a rate hike in June. If the Fed reiterates its plan to hike two more times this year the market will rally. I believe this is likely. U.S. 10-year treasuries are on major support and that level needs to hold today. If bonds break support yields will jump above 3% for the first time in four years and the market will decline. Earnings have been excellent. On average S&P 500 companies have grown profits by 25% year-over-year and revenues have increased 10%. This is the best performance in many years. Apple posted better-than-expected results and that will help the tech sector. Economic growth is strong and official PMI's were better-than-expected. ISM manufacturing came in at 57.2. That was a strong number, but slightly below estimates. ADP reported that 204,000 jobs were created in the private sector during April and that is also a strong number. The wage component of Friday's jobs report will be important and we want to see an increase below 3%. There are many crosswinds and swing traders should remain on the sidelines until the SPY can cross above the 100-day moving average and hold that support for a few days. Until then the risk is not worth the reward. The issues I've outlined above will take time to resolve and stocks will grow into their valuations while we wait. Day traders are in the sweet spot. Daily ranges have been excellent. Just follow the momentum. If the market is above the first hour high, favor the long side. If the market is below the first hour low, favor the downside. Option Stalker identifies post earnings trades and we have been day trading a very specific pattern in the chat room. We focus on stocks that have weekly options. Look for choppy action early this morning. Prices will settle down and we will be "dead till the Fed". I will trade the momentum 15 minutes after the announcement. Major support is 40 S&P points lower and major resistance is 50 points higher. Use those levels as a guide. I believe the market will move higher the rest of the week, but I'm not confident enough to take overnight positions. . .
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