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Market Should Bounce For A Few Days - Here’s Why

Posted by Pete Stolcers on August 16

Posted 9:30 AM ET – Yesterday the market took a breather after extremely volatile conditions the last two weeks. The first hour range was intact for most of the day, but sellers surfaced when bond yields plummeted. The SPY found support above the $282 level and buyers gobbled up shares at that level. That reversal off of support is fueling a rally this morning.

Yesterday US bonds spiked during the day and you can see that on a five-minute chart of the TLT (US 20 Year Treasuries). That is a buying climax and the highs should be in for the rest of the month. The flight to safety got a little ahead of itself. The yield curve is still inverted and it has not been at this level since 2007 (warning sign).

Hong Kong will launch a $2.4 billion stimulus package to reverse the recent .4% decline in GDP that was caused by riots. Protests have temporarily subsided.

Trade negotiations with China have stalled. Trump delayed the 10% tariffs on $300 billion worth of Chinese goods until December. As I mentioned in my comments yesterday, Trump’s action had little to do with Christmas shopping and everything to do with keeping the market stable. Record market highs have been one of his battle cries. A trade deal with China will not happen before the 2020 election and he should focus on USMCA and a trade deal with Japan if he wants to preserve investor confidence.

Domestic economic releases were better-than-expected this week (retail sales, Empire manufacturing and the Philly Fed), but global data points were dismal (China’s industrial production and retail sales and Germany’s Q2 GDP). The global undertow is strong and investors are worried that it’s just a matter time until that weakness hits the US.

Earnings season is winding down and good results are priced in. The S&P 500 is trading at the upper end of its valuation range (forward P/E of 17).

Swing traders should have taken some profits yesterday on the market drop. SPY $282 was one of our targets and we were then $.30 of it. Take profits when you have them in this volatile market. By all means exit your remaining position on the open today. You should still have profits. The bounce off of support yesterday and the follow-through this morning could fuel us to SPY $294. I am not overly bullish and I feel that this is simply a bounce. Once the momentum stalls there will be another shorting opportunity. I still believe that we will test the 200-day moving average in the next few weeks.

Day traders should focus on the long side this morning. YESTERDAY I TOLD YOU THAT I WOULD NOT BE BULLISH UNTIL I SAW A DEEP LOW FOLLOWED BY TWO LONG GREEN BARS ON A 5 MINUTE CHART – WE GOT IT. There are a number of companies that recently posted strong results and they should have good upside. In particular I like stocks that gaped through horizontal resistance on the news and that retraced to the breakout during the market pullback. That breakout will provide excellent support and that is our stop. These trades have limited downside and excellent upside. We will use Option Stalker to find them today.

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I’m looking for a few bullish days and then more weakness towards the end of the month. The dark clouds are looming and we need to test the 200 day moving average.image

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