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This News Could Spoil the US/China Trade Truce - Swing Traders Be Careful

Posted by Pete Stolcers on November 19

Posted 9:30 AM ET – Yesterday the market made another new closing high – the sixth in a row. Global uncertainty is no longer providing a headwind and stocks are floating higher in a light news cycle. US/China trade negotiations are moving forward and other trade agreements are also promising. The gradual drift higher will continue as long as the market doesn’t get ahead of itself.

Trade officials are commenting that the final “brush strokes” are being applied to the US/China trade truce. The market is pricing this agreement in.

Democrats plan to approve the USMCA trade agreement and that would be a huge positive for the market. Yesterday we signed a small trade agreement with Japan that reduces tariffs in exchange for Japan’s commitment to buy US farm goods and machine tools. Legal experts say the clock has run out on Trump’s authority to impose tariffs on foreign auto imports. All of the recent trade news has been positive.

There is one possible “fly in the ointment”. Republicans are asking Trump to publically support the pro-democracy protests in Hong Kong. The Senate has a bill ready that supports the protests and Trump will be forced to weigh in. This could spoil the US/China trade truce and if it does the market will quickly retrace to the breakout at SPY $302. These negotiations have been tenuous from the start.

Earnings season is winding down and stocks are trading at the upper end of their valuation range. This will provide a headwind.

The economic releases this week are light.

Swing traders should be in cash with only two or three select bullish put spreads positions. Every day we will wish that we had more upside exposure and we will be tempted to add to positions. Our patience will be tested. Eventually, a surprise will hit the newswires and we will be grateful that we stayed on the sidelines. Instead of trying to manage losses we will be pounce on the opportunity when support is established. Option implied volatilities are extremely low and this is not a good credit spreading environment.

Day traders can take advantage of the rally during the day. The bid will be tested and you need to wait for support. Spend the first 30 minutes finding the strongest stocks. Option Stalker searches that I’ve been highlighting find heavy volume and relative strength. Heavy Buying, Relative Strength 30 and 4 Bar Breakout are my favorite early searches. When the action slows down mid-day, go to the sidelines and wait for a closing move. In the chart you can see that the market has a tendency to close above the open (green bars).

Swing traders need to be patient. Be very selective with your bullish put spreads. Yesterday I outlined my strategy and the pattern I’m looking for. Day traders need to wait for the bid to be checked. Once support is established get long and set passive targets.

Trump will have to respond to the Senate bill and China may have a negative reaction. This is the only current speed bump I see.
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