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Market Has Two Possible Speed Bumps Ahead This Week - Manage Profits

Posted by Pete Stolcers on October 16

Posted 9:30 AM ET – Yesterday the “trade winds” were friendly and the market staged an impressive rally off of horizontal support at SPY $294. The move was fueled by the financial sector and the first-round of earnings reports from major banks was strong. As long as support at SPY $298 holds, favor the long side.

Trade negotiations with China are unstable and we should not expect a trade deal before the 2020 election. The best we can hope for is a truce. China will agree to double its agricultural purchases if future tariffs are delayed. The next tranche of increases was supposed to happen yesterday and we are still waiting to hear if that will happen. China can purchase agricultural products elsewhere, but it comes at a cost to its citizens. Rising pork prices contributed to a 3% spike in consumer prices. Agricultural products are the largest import from the US and China feels that it can exert some pressure there. This also hurts Trump’s constituency in the heartland.

The House passed a bill supportive of pro-democracy protesters in Hong Kong and Beijing is outraged. Prior to the face-to-face trade negotiations last week the US imposed travel restrictions on Chinese citizens for human rights violations and it blacklisted companies for the same reason. China retaliated by placing travel restrictions on US citizens who had expressed anti-China opinions. The tone is sour, but each new spat has a smaller impact on the market. Both economies are stable and US consumers have not felt the pinch from higher tariffs because the yuan has devalued. The US government is the winner in all of this because they have generated billions in tax revenue.

Friday China will release GDP, industrial production and retail sales. I’m expecting a weak number because the PBOC injected $28 billion in the financial system with loans to banks. This was a surprise move and I suspect it is because the numbers Friday will be soft. This is the biggest economic release of the week.

This morning US retail sales dropped .1% (+.2% expected). Domestic economic numbers have been slipping (ISM manufacturing, ISM services, ADP and the Unemployment Report). On a short-term basis “good news is bad news”. The Fed is likely to ease in two weeks (or indicate that they are prepared to ease this year) and that will keep a bid to the market.

Brexit negotiations took a step backwards and EU officials said that a Brexit deal would be impossible unless the UK moves on Irish border demands. The negotiations have been brisk as the deadline approaches in two weeks.

Earnings season got off to a strong start (JPM, C, GS) and banks will dominate the early scene. Good news is priced in and pre-earnings announcement warnings have been minimal. At a forward P/E of 17 stocks would do well to tread water at the upper end of their valuation range. Buyers are typically engaged through mega cap tech stock earnings and Apple is one of the last to report (October 30).

The FOMC statement, Brexit and the climax of Q3 earnings are all converging on October 30th along with major economic releases. This will be a critical time frame for the market.

Swing traders should be short out of the money bullish put spreads. I would not add to positions now. We entered these trades at much lower levels last week. If you followed my instructions your short strike is below major technical support. Use that as your stop and let time decay work its magic. If you can purchase the spreads for pennies, do so. I am expecting a new round of tariffs and the face-to-face negotiations will prove to have been a waste of time. Fortunately, I don’t think the market cares much about a trade deal with China at this juncture. There might be a drop on the news, but support at the major moving averages will hold. If this plays out our October bullish put spreads will expire and we will look for new put spreads to sell in November.

Day traders should tread cautiously on the open. The overnight news was fairly negative and I believe we could have some negative tweets today. I would not be surprised if the next round of tariffs is imposed ($250 billion worth of Chinese goods will be taxed at 30% rate instead of 25%). Support is at SPY $298 and $296. Resistance is at $302. I am still favoring the long side, but I am more cautious as we get closer to the all-time high. US/China relations are very strained and any news on this front could spark selling. Wait for market support and day trade stocks with relative strength. Take profits quickly knowing that news could hit the wires at any time. If the market makes a new low after two hours of trading, favor the short side. Earnings season is cranking up and I will be trading stocks that have posted overnight and that are gapping higher.

We caught a nice bounce in the last week and it is time to manage profits. The headwinds will be blowing from this point forward.
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