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Negative News - Buy Puts If This Support Level Fails

Posted by Pete Stolcers on August 23

Posted 9:30 AM ET – Yesterday the market gapped higher in anticipation of “warm fuzzies” from the Jackson Hole symposium. A Fed official (Harper) said that we don’t need a September rate cut and the futures fell to the 100-day moving average. It is no secret that Fed officials are divided and buyers scooped stocks on the notion that this is only one opinion. The S&P 500 rallied all the way back the rest of the day. Trading volume has been light and we can expect volatility when there is news.

Today Fed Chairman Powell will speak at the symposium (10 AM ET). In an interview this morning a Fed official (Bullard) said that the Fed could ease as an insurance policy. If this storm passes quickly they can raise rates. The market liked the news and the S&P 500 was up 10 points before the open.

Moments later, news from China hit the wires. They plan to increase tariffs on $75 billion worth of US goods (5% to 10%). This amount is negligible, but traders are more concerned that relations are souring. The S&P 500 reversed 25 points on the news.

This is shaping up to be another volatile, “news driven” day.

Flash PMI’s out of Europe were weak. The US manufacturing flash PMI fell to 49.9 (a ten-year low) and the services flash PMI fell to 50.9 (three-month low). If global economic weakness spreads to the US we will see profit-taking (even if the Fed cuts rates).

Stocks are trading at the upper end of their valuation range (forward P/E of 17). Good news is expected and profit warnings would spark selling.

Trade negotiations with Japan continue and they have been extended one day. Automobiles and agriculture are the “sticky points” and negotiators hope to resolve those quickly. President Trump will meet with Prime Minister Abe this weekend and a trade deal would calm investors.

Germany issued 0% 30-year bonds yesterday and the demand was half of what they expected. You have to wonder what the future holds when you have to pay someone to hold your money.

Boris Johnson is attending the G7 meeting and I’m sure there will be some heated Brexit discussions. This certainly looks like a train wreck ahead (Oct 31).

Swing traders should remain in cash. It’s impossible to take overnight positions in this volatile environment. The S&P 500 is making 30 point intraday swings with regularity. I do believe a shorting opportunity is setting up.

Day traders should look for an opportunity to get short today. The market is pricing in dovish Fed comments and there is room for disappointment. China’s tariff hike is a warning sign. Negotiations are not going well. Watch the 100-day moving average this morning. If we are below it, favor the short side. If we are above it, favor the long side. Powell will deliver his speech 30 minutes after the open so watch for volatility at that time.
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