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Plug Your Nose and Buy - Use A Tight Intraday Stop

Posted by Pete Stolcers on April 2

Posted 9:30 AM ET – Yesterday the market staged a nice clean breakout through horizontal resistance. Better than feared economic data from China made traders think that the worst is over. The S&P 500 is only 2% from its all-time high.

The market is pricing in a trade deal with China, an orderly exit for England, stabilizing global economic growth, dovish central bank policy and robust earnings.

These events could all be resolved favorably, but the risk is elevated.

China/US trade negotiations will continue for months and the gap is wide. Trump has threatened to keep tariffs even after a deal is reached to keep China in check. There is no way China will agree to these terms. The trade deal with Mexico has not been signed by Congress and angst on the boarder could come into play. No progress has been made with Europe and EU officials said that they are not interested in a comprehensive trade agreement.

All of England’s votes yesterday failed. The probability of a hard exit is less than 50%, but it is increasing. England will have to ask for an extension and the EU will play “hardball”.

China’s numbers might have temporarily stabilized economic growth, but they have thrown the “kitchen sink” at their economy. The PBOC has reduced bank reserve requirements 5 times, they lowered the VAT and they have started a fiscal spending program. One number does not make a trend. Europe and Japan continue to struggle.

ISM manufacturing was better than expected (55.3), but retail sales fell .2%. Durable goods orders were up .1% (lighter than expected). ISM services and ADP will be released Wednesday and those are important numbers.

The Fed has been dovish because they see the global warning signs. Last week Germany’s interest rates went into negative territory and our yield curve inverted. These are bearish signs.

Earnings season will start in two weeks. Stocks are trading near the upper end of their valuation range (forward P/E of 16.5). FedEx warned last week and it guided lower for the second time this year. It is viewed as an economic barometer.

I am a very reluctant buyer at this level and I believe the risks outweigh the rewards. Swing traders can buy a half position of the SPY with an intraday stop of $284. We are going to keep our position on a very tight leash.

Day traders should wait for the bid to be tested this morning. After a big rally yesterday, buyers will be leery out of the gate. Once support is established, favor the long side. If the market rallies above the first hour high you can get more aggressive with your longs.

The action today should be relatively quiet after a big run. Traders will wait for ISM services and ADP on Wednesday.
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