How to trade the latest test of 2,800 support

By Jani Ziedins | End of Day Analysis

May 28

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On Tuesday, the S&P 500 tumbled for the twelfth time this month on lingering trade war fears. May is on track to be the worst month of what was an otherwise outstanding 2019.

All of this started several weeks ago when Trump caught the market by surprise when he slapped additional tariffs on Chinese goods. China responded by retaliating several days later with further tariffs on US goods.

Trump continued escalating the rhetoric Tuesday when he threatened “substantial” increases on existing Chinese tariffs. Rather than getting better, Trump’s trade war keeps getting worse. No matter what Trump and his supporter believe, the stock market definitely does not agree with this trade war.

That said, this trade war has been with us for over a year and no matter how bad the headlines appear, anything will get priced in eventually. And that includes Trump’s trade war. He doubled Chinese tariffs this month, but the stock market is only down 4%. That’s not because these new tariffs don’t matter. They absolutely do because all taxes are bad for the economy. But the stock market hasn’t reacted in a dramatic way simply because the people who care about these things sold last year and were replaced by confident dip buyers. Eventually, there comes a point when we run out of new people willing to sell a headline. That’s when those headlines stop mattering.

Granted, a 4% pullback feel huge given how gentile this year’s climb higher has been, but we need to keep it in perspective. 5% pullbacks are a common occurrence in every bull market. So, the question is if this May swoon is nothing more than a normal and routine 5% pullback, or if this is the start of something far more insidious?

How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse? Click To Tweet

The first thing we should remember about market crashes is they are brutally quick. This month’s selloff started several weeks ago when Trump unexpectedly jacked up the tariffs on Chinese imports. How often does the market give us four weeks to thoughtfully reflect on a new development and give us the opportunity to get out at our leisure before the eventual collapse? That’s not how the market normally works.

Tuesday’s tumble challenges 2,800 support for the third time this month and obviously, there are two ways this plays out. Either the market collapses, or prices bounce. Of course, what that looks like over the next few days and weeks is less obvious. The most likely scenario is prices crash through 2,800 support and just when things look their most hopeless, supply dries up and prices bounce.

The stock market loves fooling everyone and violating support just before bouncing is the best way to trick both sides into giving away money. Convince the bulls to abandon their favorite positions all while tempting bears to jump on the short bandwagon. But rather than prove these second-guessers and cynics right, the market embarrasses both by turning around not long after they make their bearish trades.

Hopefully, everyone has their trading plan laid out and already know how they will respond to this violation of support. Will you hold thorough it? Will you sell defensively and be ready to jump back in after the bounce? It all depends on our outlook, risk tolerance, and time frame. What it should never be based on is how we feel in the moment. Only fools let the market turn their emotions against them. Savvy traders plan their trades ahead of time and then trade their plan as conditions warrant.

That said, there is nothing wrong with trimming a position to help sleep at night. But if you sell, always be ready to jump back in as soon as conditions warrant it.

Most Likely Next Move: The dip violates 2,800 support before bouncing.

Trading Plan: Get defensive if needed, but be ready to buy the dip once prices find a bottom.

If I’m Wrong: Waves of emotional selling overwhelm the market and prices tumble all the way to 2,600 support.

Bitcoin popped this weekend. While this strength gives me pause, the cryptocurrency keeps doing everything it needs to do and $10k is the next target. That said, we need to be careful because there are clear signs of market manipulation. All of the big moves over the last few weeks have come in the middle of the night and over the weekend. Times when the volume is the lowest and easiest to manipulate. There is a good chance some unscrupulous players could be jacking up the price in order to suck gullible buyers in so they can sell to them in a classic pump-and-dump.

The buying frenzy in Bitcoin is being driven by the price increases, not a greater adoption of cryptocurrencies. Unless BTC starts delivering on some of its disruptive promises and becomes more ingrained in the economy and consumer behavior, this latest bounce will be nothing more than a fleeting speculative bounce in a much bigger bear market.

BTC keeps acting well and momentum is higher, but the crash will be hard and fast once the music stops. The next move is probably still higher, but we won’t get much warning when this ride ends.

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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM $BTC.X


About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.