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Buy This Market Breakout - Use This As Your Stop and Target

Posted by Pete Stolcers on September 5

Posted 9:30 AM ET – This morning the market will break through horizontal resistance at SPY $294. The United States and China will resume trade talks in October and Brexit will be delayed until January 31st. These are two significant developments and the rally this morning should have “legs”.

Face-to-face trade negotiations will be scheduled the first week of October, but rumor has it that China wants the US to cancel new tariffs slated for 10/1 as a sign of good faith. China has delayed its retaliatory tariffs until December 15th and it withdrew the extradition bill in Hong Kong. The US is permitting suppliers to the business with Huawei until 11/19. Both sides are making small concessions.

This development is nothing more than a “warm fuzzy”. Both sides are miles apart and the face-to-face meeting was supposed to happen now (not a month later). Trump will try to calm investor worries until the 2020 election knowing that a trade deal with China will not happen. The market is obsessed with this trade deal, but I don’t think it matters that much. China’s currency has plunged and consumers are not feeling the pinch. Today Target said that tariff related price increases from suppliers will not be tolerated. US trade deals might slow global economic deceleration, but they won’t stop the trend.

Trump needs to sign a trade deal with Japan this month. It doesn’t look like it will require congressional approval. The USMCA will require congressional approval and it is not likely to pass the House (Democrats won’t support it). Trump could revoke NAFTA to force their hand. Trade deals with other countries would calm the market.

A no deal exit for England would be a train wreck and it has temporarily been delayed. That takes the pressure off of the market through year-end. Boris Johnson will force elections in November and if he is successful he could force a “hard” exit in January.

Germany’s factory orders for July fell 2.7% (-1.4% expected) and the construction PMI for August fell to 46.3 (down from 49.5 in July). Their GDP in Q2 was -.1% and they could officially be in a recession if conditions continue to decelerate. Germany is the fourth-largest economy in the world and it is the cornerstone to the EU.

US economic growth is stable, but slipping. ISM manufacturing is in contraction territory (49.1). Today we learned that 195,000 new jobs were created in the private sector during the month of August (ADP). This was a very strong reading and it bodes well for the jobs report tomorrow. ISM services will be released a half hour after the open and it will be an important number (54.2 in July). A reading below 52.0 would be problematic.

Tomorrow Fed Chairman Powell will speak at 12:30 PM Eastern time. That will be the last “Fed speak” before the FOMC meeting on September 18th. Fed officials have been very vocal in recent weeks and I’m not expecting anything new. The market is pricing in a quarter-point rate cut in two weeks.

Swing traders can buy a half position today with a limit of SPY $296. We will use an intraday stop at SPY $294. I believe we could see a nice rally and follow through during the day. Short sellers will be passive ahead of the FOMC meeting in two weeks. We will need a small pullback this morning to get filled at our price and the bid should be tested early. Gaps higher have typically retraced. If we don’t get filled at our price we will watch from the sidelines. Set a target of SPY $299.

Day traders should look for an opportunity to get long. The bid will be tested early and the pullback should be brief and shallow. Trade talks with China and a Brexit delay are positive developments and we should see a steady grind higher today.

There are many crosscurrents and sentiment can change in an instant. The news today is superficial in my opinion. Yield curves are inverted and global economic conditions are deteriorating. Central banks are “out of bullets” and the undertow is strong. We are walking on thin ice and bulls need to be careful. That is why we are only taking a half position with a stop and a target in place.
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