I’m not going to go into all of the details about the trade tensions that are increasing again with China. You can read the headlines. Tomorrow the top China trade negotiator is supposed to come to Washington, but if they can’t make an agreement in the hours they will have to talk the tariffs are supposed to jump up by Friday’s open.
All the happy trade talk of the past few weeks has been forgotten as now it really seems unlikely that a trade deal is going to be made in time.
I just want to tell you that when it comes to the stock market focus on the market setup and don’t try to go too far out in making predictions on what this week’s news means for the future.
Last year we saw a 20% decline in the stock market that played out over three months, but the way the market is setup up now is more like the way it pulled back in February of last year.
People have forgotten about that drop, but it was a very fast “flash crash” style pullback that was associated with a wildly overbought DOW and what was at the time a record short position against the VIX in the futures market and VIX ETF’s.
Take a look at what happened.
I circled the period of that fast pullback on the above chart, which brought a 10% dip in the DOW and wild spike in the VIX that took place over days.
The way the market is setup now something like that is more likely to happen then a drop like one that happened in the fourth quarter.
Now the DOW didn’t get as overbought going into this week as it was back last year in January, but the Nasdaq got extremely overbought with the RSI going above 70.
But more importantly, the VIX hit a new record short position going into this week that surpassed the record made in January of 2018!
So instead of a rise in the VIX to 30 over a few months that took place in the fourth
As for the S&P 500 it is now on the edge of testing its 50-day moving average.
Support below the 50-day is in the 2724-2775 zone, which is the area of its 150 and 200-day moving average and the 1/3rd retracement point of the December of 2018 and most recent high.
Below that support is at the 50% retracement point at 2651 – which would interestingly enough mark a 10% drop from the recent high.
So we’re really poised for a fast correction style drop and not a drop that will last for months in my view on this trade news.
Personally, I plan to do some buying. And will be talking with Power Investors about that. I was saying last week with the market so overbought there wasn’t much worth to do.
Now that is changing. Instead of being scared you should see it as an opportunity.
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