Market Rally Hinges On China Deal – We Could Hit An Air-Pocket Today
Posted by Pete Stolcers on May 7
Yesterday the S&P 500 dropped 50 points on the open. Trump tweeted that new tariffs would be placed on Chinese goods this Friday and the tone has soured. The initial news suggested that Trump was not happy with the progress. Traders scooped stocks on the notion that months of negotiations would not be scrapped and the market recovered half of its gains. Now we are learning that Trump’s actions were more than a blank threat. China has reneged on some of the conditions. The S&P 500 is down 28 points before the open.
The news is fairly light for the next week and trade negotiations are driving the action. According to the Financial Times president Xi only thought the odds of the deal this week were 50/50. Lighthizer said that the 10% tariff rate was set to increase to 25% Friday morning. Liu is still coming to Washington to negotiate, but his trip will last Thursday and Friday instead of Wednesday through Sunday. The market has priced in a trade deal this week and surprise favors the downside.
Earnings season has climaxed and the results were good enough to float the market at current levels, but not good enough to stage a rally. The grind higher has been very gradual. Mega cap tech stocks spark optimism and that catalyst has passed. The back half of earnings season will be relatively lackluster. At a forward P/E of 16, stocks are trading at the upper end of their valuation range and good news is expected.
The economic calendar is light. China will release industrial production and retail sales a week from Wednesday.
Swing traders are in cash and we exited 15 minutes after the open yesterday. We lost $2.50 on our last entry and we will remain sidelined. The market has been trapped in a tight range and the upside reward is smaller than the downside risk. We need a decent pullback and we will wait for that entry point.
Day traders should be careful this morning. The temptation will be to buy the early low. That tactic worked yesterday and I believe bullish speculators will get sucked in. The squabble with China could delay a trade deal and that poses a real threat to the market. If we take out the low from yesterday we could hit an air pocket as “weak hands” are flushed out of the market. I don’t believe the market will instantly bounce this morning. Wait for the downside to be tested and buy only if a higher low forms. If you enter on that pattern use the low of the day as your stop. If the market makes a new low after two hours of trading, favor the short side.
If we get an early bounce I will wait for the momentum to stall and I will short.
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