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Powerful Rally Will Continue Until This Happens - Watch SPY $281

Posted by Pete Stolcers on March 22

Posted 9:30 AM ET – Yesterday the market staged a powerful reversal from the opening bell. The S&P 500 was down 10 points and it closed 45 points higher leaving a giant engulfing pattern. The buying was relentless and this is a bullish pattern. This morning much of those gains are being stripped away by weak economic data.

We are seeing powerful two-sided action near this critical resistance level. Buyers are rejoicing that the Fed is not going to rate hikes in 2020 and that the balance sheet roll-off will end in September. They also believe that a trade deal with China will be signed and that England will remain in the EU.

Sellers are concerned that the Fed took its foot off of the brake for a reason. Global economic conditions are deteriorating and a trade deal won’t stop that trend. A deal with China will be a battle and a hard exit for England is possible. I fall in the latter camp.

This morning the European manufacturing flash PMI sank to 47.6 from 49.3 in February. This is the lowest reading in six years and it signals contraction. An analyst at ING Financial believes that Europe’s GDP for Q1 will be a dismal .2%. Europe is barely treading water and the ECB is out of bullets. Japan’s manufacturing flash PMI sank to its lowest level in three years (48.9) and it is also in contraction territory.

The Philly Fed came in at 13.7 and it rebounded from February’s surprise drop to -4.1. Domestic growth is still intact and investors are breathing a little easier after this release.

The trade summit with Xi has been postponed by three months and June looks like the earliest possible date. There are still many wide gaps and Trump rightfully does not trust the Chinese. He said that he might continue to impose tariffs after a deal is signed to make sure that they honor the agreement. China will NOT sign a deal with these terms and it demonstrates the lack of trust. The summit with Kim Jon-un was orchestrated by China and they are using North Korea as a bargaining chip. China controls North Korea since it buys 90% of their exports and they can get them to do whatever they want. The market has priced in a favorable trade deal and that is very premature.

Claude Juncker promised that the EU would work towards a unilateral free trade agreement with zero tariffs last October. Nothing has happened since then and EU trade officials have publicly stated that they are not interested in a comprehensive trade deal with the US. This will infuriate Trump and the rhetoric will heat up in coming months.

Theresa May begged for an extension and the EU gave her two weeks. Analysts were expecting at least three months. Goldman Sachs feels the probability of a hard exit has increased from 5% to 15%. They are leaving the probability of no exit at 35%. England will have to make a decision one way or the other very soon.

Stock valuations are trading near the upper end of their valuation range (forward P/E of 16.5). Investors will be content at this level as long as earnings warnings are minimal. If they start to increase we will see profit-taking. Federal Express is often considered an economic barometer and it guided lower for the second time this year.

Investors will also be watching domestic economic releases. As long as they are stable and the weakness stays abroad, the market will move higher. It could take months for the global deceleration to impact the US, or it could start surfacing very soon. It’s unlikely that the US will be immune to economic deceleration in the largest countries in the world (China, Japan, Germany, England and France).

Swing traders are in cash and we will short half of a position if the SPY closes below $281. Today we will see if the appetite for stocks has waned overnight. The market rally will continue until domestic conditions soften or until earnings warnings start popping up. When the selling starts it will accelerate quickly.

Day traders should favor the long side. Let the dust settle and wait for support. The buying was relentless yesterday and we are likely to bounce this morning. Support is at $281 and resistance is the close from Thursday. We should see brisk two sided trading today. Use the first hour range as your guide.
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