The market staged an impressive rally after the Chinese trade agreement.

PRE-OPEN MARKET COMMENTS TUESDAY – Yesterday the S&P 500 surged almost 200 points higher after a trade deal with China was announced. The tariffs will be reduced to 30% from 145% and China will also lower its tariffs on US goods. We can expect other trade deals to be announced, but this was the 800 pound gorilla and the rest will not pack the same punch. They will provide upside impetus.

The other pending piece of news is the budget bill. It will include many tax cuts and that news will be market friendly.

I have a fundamental issue with the news. The tariffs are higher than they were at the start of the year and this will impact trade. The art of the deal is to present worst case scenarios and to get the other side to believe that this outcome is real. When you negotiate to a lower level, you are where you wanted to be and everyone feels like they are getting a good deal. This only works if you have the upper hand to start with. My issue is that US products will be better able to compete in foreign markets, but the overall demand in those markets is weak. No one was buying before the tariffs and they won’t be buying now.

I don’t trade fundamentals, but I am aware of them. From a technical standpoint, the market moved through a major resistance level on strong volume. It didn’t poke at it, it obliterated it. This is the type of breakout we want. Now we want to see these gains preserved.

The price action yesterday was bullish. All of the gains held and the market closed on the high of the day. Overseas markets were up marginally overnight so there is not much of a tailwind. We will have a flat open this morning and the futures got a small pop from a better than expected CPI (.2% vs .3% expected). The PPI will be released Thursday and the economic calendar is light this week.

Big breakouts through technical resistance levels will typically retrace to that level. In this case it is the 100-day MA. If the market tests that support (was resistance) and it flies off of it, it will validate the breakout. The longer the market stays above the 100-day MA, the more bullish it is. A retest and bounce would shift my longer term bias to neutral.

If long-term Asset Managers were looking to reduce risk, they would have pounded the move higher yesterday. That didn’t happen and that tells me that they are not that concerned with the developments in China, the soft global economic data points or a hawkish Fed. There isn’t any news to spark a market drop this week and any retracement would be risk reduction at this level. It’s possible that we could see that in the next day or two, but if this is going to be a failed breakout, it would have to happen soon.

I want to wait a few days before I shift my market bias to neutral and I do not want to chase this move. I feel that we will get a small dip and that there will be a better entry point for swing trades. Much of the rally yesterday was mechanical (short covering).

From a day trading perspective, watch the first move. I believe this will be a relatively quite day after all of the fireworks yesterday. The gains need to be digested. A wimpy first move would set up an opportunity to fade it. The best case scenario would be a wimpy move lower to start the day. That would allow us to join the upward momentum from yesterday. A more likely scenario is an early grind higher. That would be more difficult to trade because we will be fading the up trend. The wimpy rally would have to end with a small climax that reverses quickly. That would set up the short. A meager top and a small drift lower would be dangerous to short.

I am going to respect the breakout and the market strength and you should favor the long side for day trading until we see some red stacked candles on volume (unlikely).

Support is at the 100-day MA and resistance is at the all-time high.