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A Bearish Trump Tweet Is Coming - Here’s Why I Am Trading From the Short Side

Posted by Pete Stolcers on November 20

Posted 9:30 AM ET – Yesterday the market had its first negative close in seven days. This morning we will test the gap from Friday. The S&P 500 is down seven points before the open and there are some mixed comments about the US/China trade truce. Furthermore, the Senate passed the bill last night supporting pro-democracy protests in Hong Kong. I warned about this in my comments yesterday.

President Trump said that China will have to make much greater concessions for the US to delay December tariff hikes and to repeal the September increases. If you remember back in May, a deal was very “close” and then China changed the entire agreement. Both sides are toying with each other. This isn’t even a trade agreement, it’s a truce.

China’s economy is growing at a 6% clip and they don’t need a trade deal. US consumers are not paying higher prices due to the devaluation of the yuan and the government is raking in billions in tax revenue. The US is not anxious for a trade deal either. Trump is the first president to stand up to China and his stance is gaining traction with voters. I’ve been saying this all year; I don’t think we are going to see a trade deal with China before the 2020 election. At very best we will get a truce.

Trump will be forced to weigh in on the Senate’s bill to support pro-democracy protests in Hong Kong. There is bipartisan support. It’s not often that you see McConnell, Cruz, Rubio, Harris, Booker and Klobuchar agree on anything. I believe that Trump will support the protesters and this will stall the trade truce. On a short-term basis this will spark profit-taking.

Stocks are trading at the upper end of the valuation range at a forward PE of 17.5. Asset Managers are not worried that they will miss a year-end rally and that’s why the volume has been relatively light. The Fed is done for the year and we don’t have that backstop. We are due for an “ugly day” that will shake out bullish speculators. I expect to test the breakout at SPY $302 and that will be our opportunity to reload bullish put spreads.

On a longer-term basis I don’t believe that a trade deal with China will improve our economic activity. We don’t export that much to China. Democrats are close to signing the USMCA and that agreement will have a much bigger impact on our growth since it involves our two largest trading partners. The US recently signed a trade agreement with Japan and it looks like Trump’s window of opportunity to impose auto tariffs has passed. These are all positive trade developments.

Swing traders should remain in cash. In the next few days Trump will weigh in on the Hong Kong protests and his support will draw negative comments from China. The trade truce will seem less likely and the market will pullback. We will be ready to pounce on this opportunity. Aggressive traders should only have a handful of bullish put spreads on right now. Use Option Stalker searches to find stocks that have rallied through resistance on heavy volume and that have relative strength. Sell the bullish put spreads below technical support and use that as your stop. You can also look for bearish call spreads. I am looking for stocks that have rallied through technical resistance and that have fallen back below it during this last leg of the market rally. I want to see heavy volume and relative weakness. PopBull and PopBear are two of my favorites searches in Option Stalker. Tonight I will release my weekly Swing Trading Video and I will highlight bullish and bearish stocks that set up well for out of the money credit spreads.

Day traders should watch the early action. Every dip has been bought and this one will try to rally as well. If the market reverses and takes out the low of the day, favor the short side. Trump has been very quiet recently during the trade negotiations. He could very well Tweet about the Hong Kong protests today. Politicians are unified on this matter and I don’t think he will wait very long to voice his opinion. If the downward momentum accelerates during the day, trading programs will kick in and bullish speculators will get flushed out. Favor the short side if the momentum starts to build. Support is at SPY $310, $307 and $305. The price action on shorts has been good intraday and I plan to favor that side. Any surprise today favors the downside and I don’t want to get blindsided by a tweet. In fact, I’m counting on it helping my shorts if it happens.

Tread cautiously and know that an “ugly day” lies ahead.
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