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Dull Market Ahead - One Pending News Event Could Spark Profit Taking

Posted by Pete Stolcers on November 25

Posted 9:30 AM ET – The market is compressing at the all-time high during a news vacuum. Asset Managers have been buying dips and the SPY candles have long tails under the body the last three days. This is a sign of support, but be careful – a speed bump looms. President Trump has been reluctant to sign a bill supporting pro-democracy protests in Hong Kong. When he signs the bill into law we can expect backlash from China and the trade negotiations will stall.

China has already threatened that there will be consequences if this bill is signed into law. Over the weekend China imposed new penalties for intellectual property theft. This is a good faith gesture and it seems like they want to get a deal done. I am still extremely skeptical and I feel that both sides are simply providing lip service to keep investors happy.

Given the political optics, I’m surprised that Trump has not signed the bill. Republicans and Democrats rarely agree on anything and both parties supported the bill. This is a slam dunk decision for Trump. If he waits much longer he will risk getting labeled as a supporter of communist China.

The greater prize is the USMCA. The United States exports four times as much to Canada and Mexico than it does to China. This agreement is within reach. Nancy Pelosi said that Democrats are close to signing the agreement. Mexico has already signed it and Canada is waiting for us to sign it.

With regards to China, US consumers are not paying higher prices and the government is raking in billions in tax revenues. China’s CPI spiked 3.8% last month because of the US agricultural boycotts. They need the deal much more than the US does.

The trade negotiations are the only news worthy event this week. Earnings season has ended and the economic calendar is light. Thanksgiving will bring trading activity to a halt. Traders will be traveling Wednesday and Friday is a half day.

Swing traders are long the VXX. I believe that when Trump signs the bill the market will retrace and option premiums will temporarily spike. We are long at $17.50. Place an order to sell at $20. We will hold this position without a stop. Swing traders should be favoring bearish call spreads. Make sure you keep your size very small. I am using Option Stalker searches to find stocks that have rallied above horizontal resistance and that have fallen back below it on relative weakness. I’m using that resistance level as my stop. Sell the bearish call spreads above that technical resistance. Your trade allocation should be minimal and I view this as a low probability trading environment.

Day traders need to be cautious. The trading volume will be extremely light and the intraday range will be compressed. Without Trump weighing in on the Hong Kong protests the market will be dull. There is nothing to drive the action one way or the other. Make sure you use heavy volume as a search variable and all of your Option Stalker searches. The bid will be checked this morning and we can expect soft price action early. Reduce your trade count and your trade size. Support is at SPY $310 and resistance is at the all-time high. Monday’s have been very slow and I am not expecting much movement today.

Tread cautiously in this light volume environment. If we get a one-day pullback, be ready to sell some out of the money bullish put spreads. Ideally we drop to minor support at SPY $305. I don’t know that we will get to $302, but that would be an even better entry point for bullish put spreads.
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