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Here's How to Fade the "Trade Talks" Rally...

September 5, 2019 By Steven Place


"Markets rise on trade optimism."

Hah. OK. We've seen this before.

If this is the normal cycle... the markets will jam higher with the anticipation that US-China trade relations will normalize...

But then something happens.

A wrench thrown into the gears. Gas on the fire.

A tweet.

And then, just like clockwork, the markets gap down overnight and we see a 2% selloff.

Couple that with a Federal Reserve that is a little ambiguous when it comes to policy, and you've got the setting for a market that puts in a garbage trading range.

Today's gap higher is... a little different. The market had been trading in a wide technical range for nearly a month and, for now, this has the look of a breakaway gap.

Even if you wanted to fade this move, it's a tough short.

Every other schmuck on the planet will be looking to short the S&P 500 into the 3000 level.

And if it's a crowded short... what happens?

A small pullback and the market gets squeezed higher.

This is not the best way to play for trade talks to fall through.

And I think they will fall through. Again.

My tinfoil hat tells me that trade relations will normalize Mid-March of 2020. Right after the Democratic Primary gets wrapped up.

What's the best way to fade this move?

I think it's FXI.

This is a China ETF that... let's say has not done well over the past few months.

Unlike US-based stocks, we can call this a proper bear market.

It's in a downtrend from multiple timeframes, and has seen two massive overnight moves on the potential resolution of the HK protests along with trade talk optimism.

You've got an ETF, in a long term downtrend, that is touching its declining 50 day moving average for the first time since the massive breakdown in August.

This offers better risk/reward to the short side than trying to short the S&P which is JUST 40 HANDLES FROM ALL TIME HIGHS.

I'm not going to give you a direct trade setup, you need to do your own DD. Standard disclaimers apply.

But if you need a good starting point, I'd be taking a look at scaling into the Oct 41 puts... SCALING because I'm probably early on this. And I'm definitely wrong if FXI manages to retake the breakdown at 41.60.

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