Posted by Pete Stolcers on February 12
Posted 9:30 AM ET – Yesterday the trading volume was anemic, but the market managed to stay above critical support at SPY $270. Optimism over a US/China trade deal and a US budget deal are fueling a pre-open rally. The S&P 500 is up 20 points before the open and the 200-day moving average is within striking distance.
I am skeptical. Politicians struck a compromise that includes $1.4 billion for 55 miles of border fencing. That is not remotely close to the $5 billion Trump wants. He could veto the bill to show his dismay and sign it later under protest. Then he will pursue other means (reallocate existing funds or declare a national security issue).
Lower level trade talks with China seem to be going well, but there are no specifics. Mnuchin and Lighthizer will join the negotiations Thursday and Friday. The market is not concerned as long as progress is being made and new meetings are scheduled immediately. Eventually a deal will be signed, but that could take many months. Trump will not meet with Xi until a deal is finalized.
Brexit looks much more tenuous. The EU is not budging… at all. Theresa May feels that she might find a legal loophole around the Irish border issue if she has a little more time. A hard exit would be bearish for the market and the deadline is 46 days away.
There will be a lot of “Fed speak” in the next few days and traders are hoping to get a feel for balance sheet reduction. The Fed wants to tighten and I believe the market rebound will make them more hawkish.
Swing traders might get stopped out of the short position today. If the SPY closes above $274, exit the trade. I still believe that good news is priced in and that the market is discounting a deceleration in global growth. If we are stopped out we will wait for a better entry point. I want to see selling pressure at SPY $273.30.
Day traders should look for an opportunity to short the opening rally. There should be stiff resistance at the 200-day MA and the last time we got close ($273.30) the market backed off quickly. Trading volume has been extremely light. Use $270 and $274 as your guide. We are likely to stay in that range. Also use the first hour range as your guide.
If Trump vetoes the bill, Fed speak is a little more hawkish, US/China trade negotiations drag on and Theresa May can’t find a legal loophole the market will retreat. There are still plenty of things (besides slower economic growth) that could go wrong. The market is pricing in a positive outcome for all of the above.
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