It was a dreary day of action for the market on Monday as stocks drifted lower on concerns of a deteriorating environment for trade as the ramifications of the Huawei Technologies ban set in.
However, such action typically has been a trap for market players who are too anxious to anticipate stronger momentum. Rather that follow through to the downside, the indices are jumping here on Tuesday morning on news that the U.S. has allowed a 90-day reprieve to customers of Huawei. The technology provided by Huawei is just too important to too many companies to cut it off without any preparation.
The news really doesn't signal any progress in the trade war with China. It is simply an acknowledgment of the how pervasive and important Huawei is as a supplier. The cost of moving too fast to ban it was just too high.
Stocks of chip companies that supply Huawei were the primary victims of the market weakness on Monday and they are seeing the biggest bounces here on Tuesday morning. The big question now is whether the buying will be sustained.
Last week we had a somewhat similar dynamic when stocks bounced back on Tuesday after they fell sharply on Monday when China imposed tariffs in retaliation. There was no real compelling reason for the bounce but it caught market players by surprise and many rushed to reposition themselves, which helped to keep the bounce going for three days.
The thing that was most interesting about the bounce last week was that there really was no compelling fundamental reason for it. The situation on trade hadn't changed, but the market acted like it suddenly was not a problem. It was price-driven action rather than news-driven action.
Will we see a replay of that action now and get some V-ish action again? The Huawei news isn't a major positive change in the trade situation, but the bears were trapped and now there is a rush to reposition. Can the bulls build on this open and keep the pressure on? Maybe. We'll give them some room and we'll see how well the early lows hold.
The key now isn't the news headlines but the price action. As I discussed on Monday, we have some trading range action developing. There is still a ways to go to the downside to test last week's lows, and the recent high of 2895 on the S&P 500 is the key overhead resistance level.
My game plan here is to treat this as trading range action and watch the action at key overhead and resistance levels. There is no reason to believe the action in either direction will be sustained, so that means focusing on shorter-term trades.