Indices are jumping sharply higher Thursday morning as a spokesperson for China's Ministry of Commerce stated: "China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war."
This was an unexpected concession and is creating hope that negotiations will resume soon and that a deal is possible.
The market has seen this sort of positive development previously and has been disappointed, so there is quite a bit of skepticism, but market players were caught by surprise and that is helping to create some chasing in the early going.
This is a good illustration of the randomness that can occur within a trading range. Bears have been anticipating a test of support levels, but bulls have been hopeful that the market would could tend to trade in a choppy manner until some positive news developed. Neither side was predicting any significant news on trade this morning.
Prudent traders should be positioned in a defensive manner at this point. There hasn't been any reason to put money to work and build positions, so cash levels should be high. That raised the question of how you navigate a surprise gap-up move like we are seeing this morning.
The best way to deal with a gap-up move like this is to simply wait for an hour or so for a trading range to develop. Once there is a small range, then you can use the early lows and highs as entry and exit points. If there is a break of the opening range to the upside, then the odds will favor a sustained intraday uptrend and that suggests that it is safe to chase some momentum.
If the opening range breaks to the downside, then it suggests that the psychology of the market is to sell into strength and that further upside will be limited.
Gap-up opens like this can also be navigated more successfully with individual stock picking rather than index plays. When markets spike down, it is more often index driven. Traders use inverse ETFs rather than shorts of individual stocks to capture exposure. When markets spike up, ETFs may be used as well, but there is a greater inclination to look for individual stocks that have been unfairly punished recently. Stock pickers go to work trying to find bargains rather than simply chase ETFs higher.
Even with a gap-up open Thursday morning, the major indices are still within their recent trading ranges. The 50-day simple moving average of the S&P 500 is at 2945 and will be viewed as a major hurdle.
Navigating this sort of surprise news event is always challenging, but if you stay patient and watch for intraday ranges to develop, it makes it easier. Don't be in a big hurry to react to the initial move.
