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Market Will Test This Resistance Level On Dovish Fed Speak

Posted by Pete Stolcers on August 20

Posted 9:30 AM ET – Yesterday the market shot higher and it stalled. The trading range was very compressed the rest of the day. This is typically one of the slowest weeks of the year and we are in a news vacuum.

Congress and the Fed are in recess, earnings season has ended, the economic calendar is light and traders are taking time off before their kids go back to school.

There are plenty of crosscurrents and the market is driven by the “news of the day”. The S&P 500 has established a wide range from SPY $282 – $294 and we are visiting both extremes. I expect that range to compress around the 100-day moving average (SPY $290) over the next few weeks.

Tomorrow the FOMC minutes will be released and we will have “Fed speak” in Jackson Hole this week. I’m not expecting anything new, but given the recent market volatility the rhetoric should be dovish. If the S&P 500 is trading below the 200-day MA ahead of the September FOMC meeting, the Fed will cut rates.

Bonds spiked last week and I mentioned a buying climax. Since that peak bonds have retraced and yields are inching higher. PIMCO (the largest bond fund in the country) is reducing its bond holdings and they feel that bonds are over-extended.

British Prime Minister Boris Johnson notified the EU that the Irish backstop provision has to be removed in order for Parliament and the cabinet to approve and exit agreement. As long as that provision remains everyone should prepare for a hard exit. This is a major point of contention and England has volleyed the ball back in the EU’s court. This will all play out on Halloween. The tone has been relatively harsh and the EU has stated that it is done granting extensions.

Trade negotiations with China are continuing by phone. If progress is made they will schedule a face-to-face (that would be bullish). Trump delayed some of the tariffs until December and some of the Huawei restrictions may be lifted. However, 49 other Chinese companies that do business with Huawei might be added to the blacklist. Both countries are trying to put lipstick on this pig, but neither side is ready to make a deal. Trump will put a positive spin on the negotiations to keep investors calm.

Global economic conditions are soft and Germany and Hong Kong are proposing fiscal stimulus. China has lowered interest rates on business loans and this is a form of easing.

Domestic economic conditions remain strong. The benefit from massive tax cuts two years ago is starting to lose its punch. Investors will be watching to see if global weakness spreads to the US.

Swing traders should remain in cash. Resistance at SPY $294 could be tested this week if “Fed speak” is as dovish as I expect. The upside reward is smaller than the downside risk in this light volume environment.

Day traders should trim their size and activity. After the opening rotation trading volumes drop off and the range compresses. If the market stays in the first hour range, fade the extremes and expect the market to close near the opening price. If the market breaks out of that first hour range, favor that direction.

Trump wants the market stable and I believe his tweets will be market friendly over the next few weeks.
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