Market Is Walking A Tight Rope – Sell Your Puts If SPY Is Above This Level

Posted by Pete Stolcers on May 24
www.oneoption.com

Yesterday the market was able to recover from an early drop and it ignored negative news. That rebound was a sign that buyers are still engaged. The political backdrop is still very tenuous and we will maintain our short position as long as the SPY stays below $274 on an intraday basis.

Trade talks with China have temporarily been postponed while a framework is drafted. Treasury Secretary Mnuchin said that steel and aluminum tariffs will remain. This was a “hot” topic a month ago and it sparked harsh rhetoric from China. The US plans to impose tariffs on imported cars. This would impact Europe, Mexico and Japan. China said that it will lower tariffs on US cars from 25% down to 15%. The US might allow cell phone chip sales to Chinese manufactureR ZTE as a sign of good faith (stiff Congressional resistance). These negotiations will be ongoing and the tone IS “testy”. China needs to keep North Korea at the table (summit June 12).

European steel tariffs will go into effect on June 1. I have not read of any trade negotiations or progress. The EU is fragmented and an agreement will be difficult to reach. Iranian trade sanctions will go into effect and that will complicate negotiations. Mexico will hold its election on July 1 and NAFTA will wait.

Deadlines are self-imposed and they can easily be postponed. However, without deadlines agreements won’t change and our trading partners are happy with the status quo. Trump will push for the agreements and if they can’t be reached he will impose tariffs to demonstrate he is serious.

Trump said that investors should be prepared for volatility. That tells me he will play hardball throughout the process.

North Korea blew up tunnels that were used for nuclear testing and that is a positive sign. The rhetoric has soured in recent days after Pence made a comparison to Libya That did not turn out well for Gaddafi. The US said it will decide next week if it is going to attend the summit. This sounds like a power-play by Trump. He knows that denuclearization of the Korean Peninsula is the priority. He won’t be played for a fool so he is keeping a pessimistic tone.

The market is walking a tight rope. One inflammatory tweet can spark a round of selling.

Economic conditions have been strong, but flash PMI’s were soft in Europe and Japan.

The FOMC minutes were hawkish from my standpoint. The Fed maintained its projection for two more rate hikes this year. We are likely to see a rate hike when the FOMC meets on June 13. Officials admitted that they are a little behind the curve regarding inflation, but they are not overly concerned.

Swing traders should be short the SPY from the open yesterday. Use SPY $274 as an intraday stop. I still feel that the market is priced for perfection (everything has to play out perfectly) and that means that any surprise favors the downside.

Day traders need to use the first hour range as a guide. Trading volume will dry up ahead of a three-day weekend. Trim your size and reduce your activity. Set passive targets. Support is at SPY $270.30 and resistance is at $274.