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Watch For These Market Warning Signs - This Is Only A Bounce

Posted by Pete Stolcers on June 6

Posted 9:30 AM ET – The market is bouncing from a deeply oversold condition. Dovish Fed remarks sparked buying and this move still has a few days before it exhausts itself. Trade from the long side, but know that this is only a bounce.

Trump tweeted that “talks with Mexico are going well, but there is still a lot of work to do”. He wants action, not words. Until border crossings decline he will impose tariffs on Mexico. This is consistent with his election promise that “Mexico will pay for the wall”. Rumor has it that Senate Republicans might block the tariffs. Illegal border crossings have hit record levels (4500 per day).

Treasury Secretary Mnuchin will meet with the PBOC this weekend at the G20 finance meeting. The rhetoric should be positive ahead of the Trump/Xi meeting in three weeks. Neither side is backing down and a deal will not be struck before the 2020 election. If Huawei continues to be blacklisted by the US, China will retaliate by blacklisting US firms. This would escalate the trade war.

The Fed said that it will remain flexible, but it did not provide a timeline for possible rate cuts. The market is already pricing in two rate cuts this year and I believe that is too optimistic. It would take a big market drop to get them that dovish. September might be the first time we see easing.

The ECB is meeting today and they are dovish. Unfortunately, Eurozone interest rates are already at zero and they have run out of bullets. EU economic growth has been steadily declining and manufacturing PMI’s in Europe are in contraction territory.

Mega cap tech stocks have accounted for much of the rally the last two years. They face stiff competition, slowing global growth and domestic antitrust regulation. At a forward P/E of 16 stocks are trading at the upper end of their valuation range and there is room for profit-taking.

Domestic economic growth is starting to soften. ISM manufacturing fell to 52.1 and ADP showed that only 27,000 new jobs were created in the private sector during the month of May. Fortunately, ISM services (80% of our economy) came in better than expected. We could see a soft jobs number tomorrow. I don’t think it will spoil this bounce because many traders will rationalize that the Fed will be one step closer to easing (bad news is good news).

Swing traders are short a full position of SPY around the $280 level. This is a longer-term trade and I am willing to ride out some of these bounces. We will use the all-time high as our stop for now. If the SPY drops below the 200-day MA we will lower our stop to $280. Slowing global growth and trade wars will force Asset Managers to reduce risk. This bounce should run its course in the next week and then we will see the next leg down.

Day traders should be prepared for a range day. After two big rallies we are likely to move sideways. The bid is still strong, but it will be constantly checked. Every time the market moves higher sellers will test support. Use the open of the prior green candle as a stop. Look for gradual moves (higher and lower) and trading ranges. The market will eventually shift from a short-term uptrend to a horizontal trading range. Next it will start to probe the low end of the trading range and SPY $280 will fail. This process should take a few weeks to unfold. Use the first hour range as your guide today and fade the extremes.

Watch for signs of exhaustion (higher opens and lower closes – red candles, late day selling and follow through the next day). This is only a bounce and the next big move is down.
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