Last Wednesday, the market celebrated a less-hawkish Fed. This morning, the market is celebrating some progress on a trade deal with China. The big question for market players now is whether the market can build positive momentum on this news, or will the struggles of the last couple of months prevent an uptrend from developing?
The timing of these two positive news events couldn't have occurred at a better time, as positive seasonality is strong into the end of the year. After two months of corrective action, many market players are anxious to make up some ground before the calendar rolls over.
Technically, the market's biggest obstacle recently has been selling into strength. Even after the dovish comments by Fed Chair Jerome Powell on Wednesday, the market hesitated on Thursday. On Friday, the action was slow in the morning but finally a little optimism about a possible China deal took hold and helped to produce a strong finish.
It has been surprising that there has not been more optimism about either of these two big events. Both have been well telegraphed, but the market was skeptical and did not rush to price in positives. This is likely due to the poor price action of the last couple of months, where positive news has been sold.
The bears will be growling loudly today about how there wasn't any real progress with China. All that happened was that there was a 90-day cease fire and an agreement to try to work out major differences over the next three months. In view of how little progress has taken place so far, there is a very high level of doubt that the issues will be settled easily.
The big question for us to focus on this morning is how willing the market is to embrace positive price action. There is likely to be an inclination to sell into this strength, as the flippers that were gaming a positive reaction will take profits. The more important technical issue is whether this big move will create new underlying support and an appetite for dip buying.
The indices turned up last week and regained some technical health, but it is follow through that is the key. Stocks need to find solid underlying support and the intensity of selling into strength has to cool.
I am giving the benefit of the doubt here to the bulls. While we may want to be hesitant about chasing strength this morning, there is no reason to believe that this spike is going to lead to a quick reversal. Many market players are out of position and underinvested after the action of the last couple of months and they should be looking to put some cash to work as the action develops here.
The price action is now positive and I'm going to stay with it until there are indications that the momentum can not continue. Be ready for the bears to scoff at the China deal and stay focused on the price action.