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Market Rally Lacks Substance - Tread Cautiously - One Tweet Could Strip Away the Gains

Posted by Pete Stolcers on October 11

Posted 9:30 AM ET – This morning the market jumped above horizontal resistance at SPY $294. President Trump said that the first round of trade negotiations went well and that he would consider a partial trade deal. We don’t have any details, just some encouraging lip service. There also seems to be some headway on a Brexit deal. The wind is still swirling, but today it is at our back.

The mud-slinging between China and the US has escalated in the last month. Negotiators finally had a face-to-face meeting and the backdrop is fairly negative. I don’t believe that a partial agreement will make that much difference and I don’t believe that a trade deal is critical to market stability. Traders are buying and selling based off of headlines and rumors. China’s currency has devalued and consumers have not felt the “pinch” from tariffs. The government has collected billions in tax revenue and both countries still have solid economic growth. I don’t believe the market needs a trade deal to tread water, but it certainly trades off of the news.

The entire rally this morning could be spoiled by one tweet and it’s important to keep this rally in perspective.

Boris Johnson and Leo Varadkar (Irish Prime Minister) met and they both feel that there could be a pathway to a deal. A customs border check is unacceptable and this has been the sticky point for a deal with the EU. The deadline draws near and the tone has improved from a very negative level earlier in the week when Johnson and Merkel agreed that a deal was unlikely.

Fed Chairman Powell spoke this week and he indicated that the Fed is ready to increase its balance sheet (ease). Traders are looking for a rate cut in three weeks and that should keep a bid to the market.

Earnings season will start next week and stocks are trading at the upper end of their valuation range. There have not been many pre-announcement warnings and that is positive. Banks will post good numbers and they dominate the early scene. Unfortunately, decreasing interest rates and soft economic numbers could impact future profits.

After the open this morning consumer confidence will be posted. It is typically a minor number, but the market has been trading off of every news headline so it could spark a move.

Swing traders don’t currently have an SPY position. I’ve tried to get long twice in the last week and we’ve been shaken out both times. I want to buy a pullback and I suspect we will have a chance to do that. Hopefully you have been selling bullish put spreads. In my videos and daily comments I’ve been highlighting the strategy. This is the best approach given the current market conditions. The strategy allows you to distance yourself from the action and to lean on major technical support. Stocks with relative strength will weather the storm and we will generate income as time decay works in our favor.

Day traders should trade from the long side. Be patient and make sure that the gap holds. There is no concrete evidence that a minor trade deal with China will happen or that a Brexit agreement can be reached. The move higher this morning lacks substance. Once market support is established, favor the long side. We are back above the major moving averages and horizontal support at SPY $294. Know that one tweet could erase all of these gains. This is still a time to keep your trade size and your trade count low.

Tread cautiously and continue to sell out of the money bullish put spreads.
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