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Market Rally Will Stall This Week - Trading Range Ahead

Posted by Pete Stolcers on June 10

Posted 9:30 AM ET – The market rebounded more than 150 S&P 500 points in the span of a week. Soft global manufacturing PMI’s, declining ISM manufacturing and a light jobs report did not dampen investor spirits. Dovish comments from the Fed sparked buying. The news is light this week and I’m expecting a trading range.

Global economic conditions are deteriorating. England posted a .4% decline in GDP. Last week Germany halved its GDP growth forecast for 2019 to .6%. Manufacturing in all of the major European economies is contracting. Japan, Taiwan and South Korea also have declining manufacturing PMI’s and the IMF lowered its global growth forecast for 2019 by .3% last week (2.6%).

Trade tensions with Mexico have eased and the tariffs might be avoided. US border patrol agents will monitor illegal border crossings and if they decrease substantially the tariffs might not be imposed. Trump wants action not words. Illegal border crossings surged to a record high of 144,000 in May.

The market is addicted to easy money. Global bond yields are near historic lows and they do not keep pace with inflation. This forces investors into equities and it explains why the market is able to move higher when all of the surrounding news is bearish. As global economic conditions deteriorate, credit concerns will surface.

Trade negotiations with China have stalled. The tone should be civil until Trump and Xi meet in three weeks. I don’t believe we will see a US/China trade agreement before the 2020 election. I think both leaders will put a positive spin on the meeting, but there will not be any progress. China is prepared to blacklist US companies that do not sell components to Huawei.

Swing traders are short the SPY at $280. This is a longer-term position and we are going to use the all-time high as our stop. Global economic conditions will continue to soften this summer and I still believe the next big move is down. The rally that started in January will take time to turn.

Day traders need to gauge the strength of the bid this week. In particular, watch the open today. If this gap higher is faded we could see a reversal. I will be watching for higher opens and lower closes. Late day selling with follow through the next day is also a warning sign. We are likely to form a trading range for a week or two. Then the bid will start to soften and we will test the downside. Watch for an early dip today. If support is established early, trade from the long side. If the market makes a new low after two hours of trading, favor the short side.

Watch for a trading range to be established this week. The market should stay between SPY $280 and SPY $290 most of June.
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