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Market Has Formed This Bearish Pattern - Buy Puts

Posted by Pete Stolcers on May 29

Posted 9:30 AM ET – Yesterday the market tested the upside and it quickly reversed. After trading in a range for two hours it started to leak oil. Stocks drifted lower entire day and the market did not bounce in the last 30 minutes. The selling pressure was heavy and it is spilling over today. The S&P 500 is down 20 points before the open and a test of the 200-day moving average is likely.

The trade war with China is escalating and Beijing could threaten to cut off rare earth supplies to the US. It is used to manufacture electronic components and it is also used as a catalyst in oil refining. China controls over 90% of the world’s supply and this threat has been known. Rare earth minerals are actually not rare, they are difficult to process (pollution). This is not as big a threat as it might seem and here is a link to an article that discusses the impact. More importantly, the tone is deteriorating.

https://www.nytimes.com/2019/05/23/business/china-us-trade-war-rare-earths.html

China will post its official PMI on Friday and that will be a critical number. Analysts have been looking for a post stimulus bounce (monetary and fiscal) and conditions have softened the last two months. China is prepared to “weather the trade war storm”. If the PMI drops the market will fall. It is the global economic growth engine.

Economic activity in Europe is dismal and Germany’s yields went further into negative territory yesterday (a sign of weak economic growth). Brexit is in limbo and Italy continues to defy EU deficit rules. The union is fragile and economic conditions are so bad that the ECB can’t consider raising interest rates from 0%. Europe has painted itself into a corner.

The greatest market threat is not a trade war with China. Even if an agreement is reached it won’t stop the global economic backslide. Growth in the largest economies in the world (China, Japan, Germany, France and England) is declining. I’ve been saying this for weeks and I also mentioned that a trade deal with China is unlikely before the 2020 elections.

Swing traders should short the SPY on the open this morning. Only take a half position. We have been patient to this point and technical support levels are starting to crumble. If the market closes below the major moving averages we will add to the position.

Day traders should look for opportunities to get short. The price action yesterday was very bearish. Typically during a down trend day we will see a late day bounce as shorts cover. That did not happen yesterday because sellers hit bids and they offset that demand. SPY $280 is a minor support level and we are well below it today. We are only 10 points from the 200-day MA and it will be tested today.

In the chart below you can see that a head and shoulders pattern is formed. Today we will break the neck line.
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