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Market Lab Report - Premarket Pulse 12/17/18 - Chop Suey Markets

Markets remain in a state of volatile flux between the on-again, off-again headline news regarding trade between the U.S. and China. Nevertheless, the choppy downtrend remains intact with leading stocks continuing to falter. The FAANG tech juggernauts remain under their 200-dmas with price/volume action suggesting further downside.  AAPL has lost more than $200 billion in market cap since October.

Nevertheless, some have suggested December may be a slower month due to the holiday season. This is a statement of hope since the trade issue is still alive but potentially unwell. Also remember that while 2008 was different, elevated levels of volatility can create a turbulent December as it did then as well as in 2000 and 2002. Thus stocks can swing widely.

Still, bond yields have dropped as a reflection that the Federal Reserve will have to maintain a more neutral stance with respect to rate hikes. This could potentially stabilize the market, though volatility remains elevated with pronounced selling pressure at times, thus remains a trader's market.

While Wyckoff undercut & rally patterns worked well earlier this year, shorting into resistance has worked best as air was let out of the stock market since October due to bond yields which were on the rise as well as trade issues and fears of a flattening yield curve. We have discussed each point in prior reports, thus the situation remains fluid, though price/volume overall suggests further choppy trading with a bias to the downside. 

Due to elevated levels of volatility, the sidelines are not a bad place to be in this choppy environment. If one wishes to take positions, one either must be nimble to cover losses quickly, or widen their acceptable maximum loss to avoid getting whipsawed. The Market Direction Model is not a day or swing trade vehicle, thus it tends to lean toward increased acceptable maximum losses should it take a buy or sell position when volatility is elevated.

One must continue to keep a close eye on actionable possibilities in stocks if one wishes to trade in this chop suey market environment. That said, very few stocks have produced any meaningful gains over a longer than day or swing trade period, thus this remains what we call a day trader's market.

While the European Central Bank will end its QE bond buying program, it has no plans to hike rates in 2019 as of yet. Its economy will have to show signs of life before it has such headroom to do so. Meanwhile, China reported a set of weak economic data, once again raising fears that the world's second largest economy is faltering. China's November retail sales grew at the weakest pace since 2003, a 15 year low, while industrial output rose the least in nearly 3 years as domestic demand softened further, all while China works to settle the trade dispute with the U.S. Some analysts have suggested rate cuts in China will happen in the weeks ahead, thus somewhat offsetting the ECB's plans to end its QE program. It has also been suggested the U.K.'s Bank of England may need to play its trump card of increasing its level of QE in regards to the calamitous Brexit issue to gain some leverage.

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