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New Law Will Cause A Market Drop - Be Ready To Buy - Much Bigger News Is On the Horizon

Posted by Pete Stolcers on November 22

Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS FRIDAY – The market has been a little soft this week and that should be expected after a nice run. Support at SPY $310 is holding, but a speed bump lies ahead. President Trump will sign a bill that supports pro-democracy protests in Hong Kong. That news could come today and China is already warning us that there will be consequences.

Trade negotiations with China are progressing at a slow pace. Trump said that China will have to make major concessions if they want to avoid another round of tariff hikes in December.

Republicans and Democrats rarely agree on anything, but they unanimously supported pro-democracy protesters in Hong Kong. I believe that Trump will be vocal about it and the trade negotiations will end. He is the first president to stand up to China and that stance is gaining traction with American voters. Consumers are not paying higher prices and the tariffs are generating billions in tax revenue. US trade negotiators were extremely optimistic about a trade deal in May. China changed the agreement and yanked the rug right out from under them. I believe Trump will give them a dose of their own medicine.

These negotiations are nothing more than a game. There will not be a trade deal before the 2020 election. As long as both sides keep the dialogue going, investors will be pacified.

I’m hoping that this speed bump flushes out bullish speculators. We are ready to sell bullish put spreads on the next market drop. We can’t sell them now because option implied volatilities are too low and we have to go too close to the money to generate a decent credit.

The bigger news is that Democrats are close to signing the USMCA agreement. Mexico and Canada are our largest trading partners and this will have a much bigger impact on economic activity than a trade deal with China. To put this into perspective, the US exports four times as much to Canada/Mexico than it does to China and the US exports twice as much to Canada/Mexico as it does to the EU. I feel that this news has been swept under the carpet. I want to buy any market dip and I hope that Trump’s statement supporting Hong Kong protesters sparks profit-taking.

Flash PMI’s in Europe were in line. Manufacturing was slightly better-than-expected and services were slightly below expectations. The economic calendar is light and earnings season is over. Thanksgiving will cut the action next week and trading ranges will compress.

Swing traders are long VXX. I view this as a relatively safe trade. Option premiums are at a 52-week low and they should find support here. The VXX moves up when the market moves down. I feel that the downside for VXX is relatively contained and there is nice upside for VXX if the market reaction to Trump signing the bill is negative. Set a target to exit at $21. In the last few days I’ve been focusing on bearish call spreads. I like selling premium on stocks that have recently poked through resistance and that have fallen back below that resistance on heavy volume. Sell out of the money bearish call spreads above that resistance level and use it as a stop. Option Stalker finds these stocks and I’m also looking for heavy volume and relative weakness. I’m not selling many spreads – this is a good time to be on the sidelines. We need to patiently wait for a market dip.

Day traders should look for shorting opportunities early in the day. The bid will be tested and there is a chance that Trump might sign the bill early in the day. I don’t want to get blindsided by a 20 point S&P 500 drop on the news so I am not trading from the long side. I am shorting weak stocks and taking profits along the way. When bounces stall and the uptrend is breached I reload. The market will be very quiet until Trump makes a statement. If it doesn’t happen today the range will be tight. If he waits for the weekend he might be more vocal about it. If the news does not hit today I will buy some SPY puts near the close (not many).

Be patient and wait for a higher probability trading environment.
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