Trump Springs a Bull Trap, but Opportunities Abound

On Friday, market skeptics were caught by surprise when the indices moved broadly higher on much better-than-expected jobs news. There had been some concerns that the Fed wasn't more dovish on Wednesday, but it seemed like the right call after the strong report on Friday. The bears were caught leaning the wrong way and many momentum buyers were enticed by the strong technical action.

Monday morning, the tables have turned. It is the bulls that suddenly find themselves on the wrong side of the action. After months of confident statements that a trade deal with China could happen at any time, President Trump suddenly expressed his unhappiness with the pace of negotiations are threatened to substantially raise tariffs on Chinese goods. The Chinese responded by saying they may cancel a scheduled meeting in the U.S.

It is unusual for a market that is trading near highs to suddenly dip this sharply. Typically, the market has some clue that a negative is lurking and will start to anticipate a pullback. This time, the market did not see the bad news coming. In fact, there had been reports that a final deal may be struck as soon as this coming Friday.

Markets around the world sold off on this news, but the big question now is whether this is the start of a major turning point or just a bout of volatility that will resolve itself favorably.

I don't know the answer to that, but given the history of the trade negotiations, this sort of bad news tends to be followed by good news quite quickly. The market isn't feeling very confident about that right now, but we will quickly see at the open whether the dip buyers have conviction.

Bad news, like that we are dealing with this morning, tends to be index and futures driven. Everything is being sold in tandem, as large baskets of stocks are sold rather than individual issues. The good news is that many stocks will be sold without regard to their individual merit. That may cause some short-term pain, but it always creates some opportunities if you are selective and can find some good entry points.

I am looking for dip buyers to step up very quickly this morning. The key thing to watch will be the early lows. If they hold, then the dip buyers will gain confidence and start buying more. If the opening lows do not hold, then it will trigger more sell stops and cause a little fear.

It is always the close that matters most. A close at the lows would be a major technical problem, but if there is intraday support and a decent recovery, the worries will be quickly forgotten.

My game plan is to identify some key names that I like on the weakness and to do some incremental buying. I'll be keeping stops fairly tight and will be watching to see if the indices hold above the early lows.

Market action like we have this morning can cause some pain, but it also creates good opportunities if you keep your emotions under control.

Currently, the S&P 500 is indicated down 1.5%, but is off the overnight lows.

At the time of publication, Rev Shark had no positions in any of the securities mentioned.