Stay In Cash Until We Get A News Driven Breakout – Market Compression
Posted by Pete Stolcers on May 17
This week the S&P 500 tested the 100-day moving average and that support level held. I view this as bullish since there were a number of negative news releases that could have sparked selling. Trade negotiations are ongoing and as long as they remain friendly the market will tread water.
China’s trade delegation will meet in the US today and tomorrow. Both sides are far apart and we can expect this process to continue into the summer. Trade negotiations with Europe will take longer due to trade sanctions against Iran. A trade agreement with Mexico will wait until their elections are over (July 1). As long as there are no inflammatory tweets the market will consolidate around the 100-day moving average.
The market had to fend off news that North Korea might cancel the summit. US 10-year treasury yields are above 3% and that has previously sparked selling. The S&P 500 has been able to maintain the 100-day moving average and that is a sign that the selling pressure is subsiding.
I’ve been mentioning for the last few weeks that the key component to the next leg higher is time. Trade deals will be finalized, economic growth will be confirmed, wage inflation will subside, the Fed’s dovish stance will be apparent and stocks will have time to grow into current valuations.
The trading range will compress for the next few weeks. The volume has been light and the market will be in pre-holiday mode next week.
Swing traders should be sidelined. Trade negotiations are fragile and one inflammatory tweet is all it will take to spark selling. Trump said that investors should be prepared for volatility. He has been known to walk away from the table to get a better deal. We will wait for the deals to be finalized. In the meantime we might benefit from a market decline. That would provide us with an excellent entry point.
Day traders should wait for the momentum to establish itself. Use the first hour range as your guide. The intraday momentum trades are decreasing as the market compresses. Reduce your size and your trade count.
The news is light and I don’t believe we will see a big move in the next week.
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