Market Will Struggle – SPY $287 Will Be Tested – Take Profits and Wait
Posted 9:30 AM ET – Last week the market broke out to a new all-time high when a trade deal with Mexico was signed. Since then stocks have gradually been drifting lower and we are likely to test the breakout at SPY $287. The backdrop is filled with potential speed bumps and Asset Managers are not aggressively buying this breakout. The price action during the next week will reveal which side we need to be on.
Trade officials are feverishly working towards an agreement with Canada. If a deal is signed with Canada the rally will be negated by new tariffs on $200 billion worth of Chinese goods. Our talks with China are not progressing well.
I don’t believe the EU or China will sign trade agreements before the November elections. They don’t like Trump’s policies and they don’t want to facilitate his agenda. Potential trade wars could keep his base from voting. If Democrats win the House his momentum will stall.
Credit issues are looming in emerging markets (Italy, Argentina, Turkey, Pakistan and Indonesia) and there are new hot spots each day. If China’s economic activity starts to falter I will be watching for defaults in the $17B shadow banking industry. Credit concerns are the one thing that can quickly spoil this rally.
The Fed will raise rates in a few weeks and traders want to see the word “accommodative” replaced with the word “neutral”. This would be a sign that this round of tightening is coming to a close. I personally believe that the Fed will keep raising rates as long as the market holds up. They want to get yields back to normal as soon as possible.
The market has discounted a government shutdown towards the end of the month, but the possibility of a threatening Tweet is ever present.
North Korea is continuing its nuclear program and Pompeo’s trip was canceled. Iran is threatening to shut down the Strait of Hormuz if sanctions are imposed and the rhetoric/naval activity will escalate into November.
The economic news this week has been decent. ADP just reported that 163,000 jobs were created in the private sector during the month of August. That number was a little light. ISM services will be posted after the open. In general the economic news should be market friendly. Unfortunately, the releases will be overshadowed by the speed bumps I have referenced.
September is historically a bearish month. I believe that support at SPY $287 will be tested. Too much of the market rally can be attributed to a handful of stocks (AMZN, AAPL and MSFT). The breath is narrow and we need to see broad participation.
Swing traders should place an intraday stop at SPY $287 and a target at $292. If support is breached we will take our profits. If the market shoots higher we will also take profits into strength. The outcome from the events I’ve mentioned could spark selling. If SPY $287 fails easily we might take a short position. It is too early to tell and we need to see what happens at that support level.
Day traders should focus on the short side. We’ve seen steady selling since the high last week and it don’t believe it will and until the breakout is tested. Focus on stocks that have been weak relative to the market and that are breaking horizontal support levels.
I don’t believe that economic numbers this week will have much of a market impact. We could see a rally if a deal with Canada is reached and we could see a drop if new tariffs are placed on China. Look for choppy conditions with a negative bias the next two weeks.
Market commentary provided by OneOption, LLC a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.