China trade negotiations also a trading opportunity for the stock market?

It is almost a fact that the US/China trade deal will be reached sooner rather than later. I feel that the current selloff may be an excellent short termed trading opportunity. It is quite likely that markets will remain choppy for the next week, or weeks, until the agreement appears to become more settled. Thereafter, it is also likely that stock markets will stage a strong rebound upon some kind of settlement in the deal. This, I believe, is where the short termed trading opportunity lies.

However, there are some things to keep in mind. In most of my readings of research by people who know International markets a whole lot better than I do, it may be that US market has less to gain in this agreement. That’s because Chinese equities are underpriced vs. the US – and because the US market is in the late part of its growth cycle. Larry MacDonald of Bear Traps/AGC Analytics suggests the best strategy is to reduce North American exposure on a trade deal rally. Basically, Larry feels that China has more to gain and more stock market upside upon a deal. His call is to reduce North American equity (Canadian and US) and buy international markets.

Meanwhile, China has been experiencing slowing of growth. The Chinese banks are particularly vulnerable to that slowing. As such, it is becoming clear that the Chines government will recapitalize the banks. Expectation is this will be simulative to the Chinese economy and market. Remember—government monetary stimulus often equals market growth.

There may be trading opportunities for buying and selling into the volatility over the coming weeks. ValueTrend reduced equity exposure in the Equity Platform last week. We now sit at 20%+ cash. We may deploy some of that capital on a technical oversold signal, then exit again. This is something that will be played if we get the correct indications for a trade.

Neartermed timing model

The daily chart below shows the ValueTrend neartermed timing model. Many readers who follow my blog will have seen this chart below. It is a very quick timing indicator that tends to predict temporary market troughs and tops. It is not of much use for longer termed moves, but it does tell us when the market has gone too far in one direction temporarily. The chart shows us that we have a lower Bollinger Band touch. We are past the oversold line on the RSI indicator (bottom pane) but not on the stochastics indicator (first pane below chart). We are nearing a buy signal – which would be official upon a move by the BB remaining at its lower band, and stochastics below the buy line. Just as important will be a hook by RSI and stochastics. This could occur any day now.

Mid-termed timing model

On the weekly chart below, you will note that RSI and stochastics (first two panes below price chart) are hooking down.  But they are nowhere near oversold. MACD is also hooking down. Primary targets – should the selloff continue, will be 2770 or thereabouts (old support, and where the 40 week/ 200 day SMA lie) – and 2600 in a worst case scenario. These targets are marked by green support lines. I do not anticipate a retest of December’s lows—but anything is possible. Such an occurrence would likely be short lived, if it happened at all.

Conclusion

The weekly (mid-termed) outlook suggests the potential for some more downside. I am inclined to suggest that my first target of just below 2800 will find support – mainly because of the near-bullish reading on the short termed timing model –i.e. my daily chart at the top of this page.  However, anything can happen. I anticipate deploying up to half of my cash near 2770 or so– and then seeing if things deteriorate or rally from there. I’ll certainly look at any trade as a neartermed upside flip.

Perhaps we will see a rebound to 2900 on the SPX in the next few weeks. That would be my cue to raise cash again.