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Stock futures are pointing to a higher open this morning, but despite the bullish price action– there has been significant structural damage done to the market that we need to talk about.

So much so… that I wouldn’t be surprised if the market reverses and even goes negative today.

And according to the world’s largest hedge fund manager, Ray Dalio, the U.S. is expected to dip into a recession before 2020.

Of course, that’s just one (powerful) person’s opinion, and no one has a crystal ball. But as traders, our job isn’t to forecast, it’s to seize opportunities in the market.

And despite all the gloom and doom talk you’ve been hearing recently,  just know there are plenty of strategies that focus solely on capturing alpha in a market downturn… and I will teach you how to master and profit off of them.

But first, there are a slew of charts that I need to go over with you, not only to prepare you for the upcoming trading day, but for the days and weeks to come.

There are key levels, that you should be aware of, that show you signs to look for to either get aggressively bullish or bearish.

 

The Trade War Has Already Damaged the Markets

 

Even though the market bounced yesterday… as Walmart Inc (WMT) pulled stocks higher after its earnings beat and strong guidance… and gapping up today… it doesn’t mean it’s all glitz and glory for the market.

As we all know… one company doing well isn’t a real indication that the overall market will do well… and comments on renewed trade talks can change very quickly.

We’re still in the midst of a full-fledged trade war… and there’s still a chance that we see a quick correction in the market… and a potential recession.

Before I get into the reason behind this selloff, why the market is acting the way it is, and where we go from here… I need to bring something to your attention… something that will tell us which direction the market will actually move.

I’m talking about the Death Line, and we’re still pretty close to it.

Why are traders focused on the key level at $282 – also known as the Death Line?

Well, if you look at the chart above… you’ll notice that SPY has actually bounced off the red line (the Death Line) on the hourly chart multiple times. Yesterday, we saw the bulls hold the line as they fended off the bears.

Today, we’re seeing some “buy the dippers” come into the market, as it’s set to open up around the $287 level. However, if you look at the chart above, that’s a key resistance level… and it wouldn’t be surprising to see the market pullback after it reaches that level.

You see, there are only so many traders who will be willing to jump into the fire and start buying stocks with all this volatility…

… if the bears win the battle and SPY breaks below the Death Line, it wouldn’t be surprising to see a sharp move lower… and I can use my system to take advantage of crashing stocks.

So what brought us to this Death Line?

It’s all been due to a game of “He said, Xi said”. What I mean by that is what Trump and Chinese President Xi have been saying and doing.

Both sides are treating the Trade War as a zero-sum game… and it’s hurting the market.

You see, China and the U.S. want to make their own rules… and neither side is incentivized to take a deal right now.

Why should China bend the knee to the U.S. when it’s raising tariffs on Chinese goods?

Why should the U.S. bend the knee to China when it’s taking advantage of U.S. consumers?

Neither side wants to bow down… and both want to come out of the Trade War as the clear-cut winner.

Consequently, we’ve seen a lot of back and forth action between Trump and Xi as each side is trying to get the upper hand… one day Trump is slapping on tariffs… in an attempt to force China into a trade deal…

… a few days later, we’re seeing China weaken its currency to levels it hasn’t seen since 2008 to prevent tariffs from affecting its economy.

Two weeks ago, Trump came out and said the U.S. would impose 10% tariffs on $300B worth of Chinese goods… and China retaliated by introducing a new powerful weapon to the Trade War on Aug. 5 – its currency.

By weakening its currency below a key psychological level at 7 Chinese Yuan, it sent shockwaves across the globe and caused all this volatility… pushing SPY down to the Death Line at $282…

Thereafter, we saw Trump try to support the market and take some risk off the table by pushing those tariffs until December 15… however, that tactic didn’t work, as the markets have continued to be put under a lot of pressure.

The Trade War has been hurting the economy… and we’re just now starting to feel the effects of it

We’re finally figuring out the real cost of an all-out trade war… and traders are finally taking note of this.

In a market that’s as intertwined as this one… there really isn’t going to be a side that wins and doesn’t take some damage.

Why?

Well, think about it this way… tariffs have negative effects on not only the end-consumer but also producers.

So when the U.S. raises tariffs, it actually hurts the overall economy, as consumers will be less likely to spend money and spur economic growth since they don’t want to pay higher prices. Not only that, it ends up costing companies money… pushing them to look for ways to cut their expenses.

And the trade war has been actually hurting the economy for a while… all happening right under our noses.

You see, the trade war has directly impacted economic growth.

According to Moody’s Analytics, the trade war with China has already eliminated 300,000 jobs and caused GDP growth to drop by 0.30%.

It might not sound like a lot to you… but a few quarters of stagnant or contracting GDP growth is the definition of a recession… and if tariffs continue to be slapped on by either side… it could impact GDP growth by as much as 0.70%.

That added another degree of volatility to the market that we can still take advantage of, as the yield curve confirmed all this with one of its largest sirens earlier this week.

We saw the 10-Year Yield get below not only the 3-Month Yield… but also the 2-Year Yield.

Typically, we see this action in the bond market prior to recessions. In fact, every single recession that happened over the last 50 years or so was preceded by an inverted yield curve (longer-term yields falling below shorter-term yields).

Source: New York Fed

The price action in the bond markets sent stocks plummeting and forced SPY down to the Death Line… as traders were fearful of a recession and panic selling stocks to take some risk off the table.

It’s quite clear that the trade war has been affecting the economy… and you’re probably on the edge of your seat right now wondering, “Jeff, where do we go from here… what happens next?”

The Key is in the Death Line

We’ve already seen how chaotic a devaluation of China’s currency can be… and it could use the same tactic if Trump threatens China again with tariffs, which would essentially nullify the tariff… causing a standstill and a frenzy in the markets.

We could also see both sides engaging in peace talks again and coming to a short-term agreement, which could cause the market to bounce.

Sure the market is gapping up for this morning…

… but it seems like neither side will give in… and all it takes is one tweet or one thing Xi says to send the market lower.

With that being said, I’m going to remain nimble and look for stock-specific plays until I see a clear direction in the market.

Here are the charts I’m looking at currently…

You saw this chart earlier, and it’s going to be a key level. If SPY breaks below this, look for a rush of sellers. On the other hand, if it holds that level and starts to bounce… it’ll attract the “buy the dippers”, which we’re seeing this morning.

However, as we all know… one bullish day doesn’t mean we’re trending higher because there are still a lot of risks on the table.

If you’re into tech stocks… then you’re going to want to keep an eye on the Death Line (just below the $180 level) in the PowerShares QQQ Trust (QQQ) – the tech-tracking ETF. Sure, QQQ is set to gap up to $185, but that’s right at a key resistance level… and just like SPY, QQQ could pull back from there.

If I decide to make any market moves… I’m going to let my clients know exactly what I’m doing. I’ll tell you one thing, no matter which direction the market goes… there is money to be made.

That’s the beauty of being an options trader… I’m not locked into being a bull or a bear… I can navigate the markets and use my alpha-generating strategies if we break below the Death Line or if stocks rebound.

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