Many market players were caught by surprise on Monday when an oversold bounce gained substantial traction and bad news from Boeing Co. (BA) had no impact on the indices. It was a very steady day of buying on excellent breadth. Whatever had been bothering the market last week was totally forgotten.
Early indications here on Tuesday morning are flat to down as market players contemplate the potential for follow through. There is talk between U.S. and China officials about arranging a meeting to move toward finalizing a trade deal, the U.K. is voting on a Brexit deal and House Speaker Nancy Pelosi has expressed her lack of support for an impeachment move.
Nervousness over the progress of a China trade deal is the biggest impediment to further market progress. The selloff last week was triggered primarily by a "sell the news" reaction to a headline about progress on trade. Even though it was quite positive, the market decided the news was already discounted and a sharp reversal ensued.
Market players will remember this reaction to positive trade headlines the next time a headline hits. It is going to be much tougher for a sustained move to gain traction and that is the primary driver for the market right now. No one wants to be caught being too negative if a trade deal is made, but there will be plenty of market players looking for an exit into strength.
Anticipation of a trade deal and a resolution of the complex Brexit problem are giving the market support. However, worries about overhead resistance, a sell-the-news reaction and a lack of new positive catalysts are likely to keep things contained. The recent worries about economic growth are out there still and will be used to explain any weakness that may occur.
This is a recipe for trading range action with last week's lows serving as support and the highs of the week before serving as overhead resistance. There is some good action in individual stocks and that is helping sentiment quite a bit, but the lack of follow through here on Tuesday morning is going to make some of Monday's buyers nervous.
We have a soft open, but the market can afford to give back some of Monday's gains. As long as the Monday morning lows hold it won't be a technical problem, but Monday's momentum may be more fragile than it seemed.