The natural reaction of many traders to this morning's big bounce on trade headlines is to short or sell strength. The justification for that is easy to understand. Nothing has really changed and technical conditions remain negative. The bounce was driven by a series of big buy programs hitting all at once and therefore, the bounce should fizzle out fairly fast.
That is first level thinking and will always sound logical. However, this is a market that is mainly driven by computer algorithms and big money that focuses more on price action than fundamentals. The news headlines this morning are just a trigger for a series of reverberations due to the shift in emotions. Typically, computer algorithms are driven to keep the bounce going longer than many expect because it is easier to keep emotions running in a positive direction. This produces some squeeze action and fear of missing out and that makes for better shorts when it eventually comes to an end.
When considering how to trade this sort of action it is important to think about it in terms of game theory as that is how the computer programmers think. They are not looking at valuations or metrics of that sort. They are focused on psychology and emotions. They avoid what is obvious in order to gain an edge.
What is obvious here is to immediate short into a big move on news that isn't really all that significant. Obvious does work at times but if you think like the machines that isn't what you are looking for. Further upside better serves the interest of the computer algorithms and they will try to keep it going.
An additional complication this morning is that the situation in Hong Kong continues to intensify. That can be used as a potential negative market catalyst but it doesn't seem to be having much market impact so far.
I'm not looking for this bounce to immediately fall. There could be some news flow that changes that but the price dynamics of computer algorithms favor more upside from here. My plan is to look for short entries only after there is weakness. That is what worked when I started shorts on Monday morning and should work again eventually