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How to play the trade wars

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  • How to play the trade wars

    Update: This short position was covered after the market started a sharp upturn. The markets can turn on a dime and as a trader its important to not be blinded by your own biases about the market. Listen to what the price action is telling you.

    During the month of May 2019, equity markets witnessed a steep downturn which shook up traders and investors alike.

    The downturn was caused by different tariffs being imposed and the threat of more by President Trump. Whenever markets found some stability and looked like they would rebound more news came out and we went for another ride to the downside.

    What we were witnessing was a shift in global economic sentiment and markets acted accordingly. When markets are reacting to such strong news as this you can't expect markets to find any real support on technical levels of a chart.

    If you follow our Platinum Swing Trade Alerts service then you can see that even we took a bit of a hit during the month of May. Thankfully we have already booked enough profits in the first half of the year to sustain a few losses.

    We have traded many markets just like this one and there is a set of rules we always apply when markets start to take a dive. Here is our plan of action during trade war worries until markets cool off and find some support:

    1. We stop entering long swing trade positions until the overall market trades back above the major moving averages of 200 and 50. Refer to the image below for a visual.

    This is a daily chart of the S&P 500 as of 5/31/2019. The S&P is a "traders" index because it is comprised of more stocks than the Nasdaq and the DOW combined giving trades a better overall view of what markets are doing.

    2. On Friday, 5/31/2019 we entered a small short position on the SPY which is an ETF based on the S&P 500. This trade is meant to be held longer than our usual trades because there is not much chance of the market recovering swiftly from this downturn. We could easily see months of downward movement. This could be a hot summer in more ways than one.

    Trump's trade war is getting deeper by the day. He plans to increase tariffs on all Mexican goods in the coming months until Mexico comes up with any kind of plans to tighten border security.

    The schedule of increases is as follows:
    Jun 10 - 5%
    Jul 1 - 10%
    Aug 1 - 15%
    Sep 1 - 20%
    Oct 1 - 25%

    Mexico supplies 14% of autos sold in the U.S.

    If you remember, Donald Trump didn't hesitate to shut down the government from December 2018 until January 2019. I wouldn't think it would be a good idea to fade Donald Trump's threats.

    Whether you like the guy or not isn't the issue. We are traders here at Wall Street Forum and our first priority is capital preservation and then maybe making a few dollars.

    With that being said, we have on our short position in SPY and will be playing it like a medium-term trend-following position.

    Our position numbers on this trade are as follows.

    Short entry price: 275.50

    Target price: to be determined by the market

    Stop price: 291

    The stop price is positioned above the previous high as to prevent us from being shaken out on a dead cat bounce move. (if you are unaware, a dead cat bounce is when a down-trending stock or market has a few days of up moves before it continues going lower.) You don't want to get stopped out by having a close stop loss order only to watch the market move lower.

    Our initial position size is small so if we get stopped out it won't hurt too badly and that would also mean that markets have rebounded nicely and it would be time to start putting on some long trades again.

    As the market moves lower, as we think it will, we will continue to move our stop-loss order to just above the most recent lower high on the daily chart while also adding more shares at each stair step lower.

    If you are a subscriber to our
    Platinum Swing Trade Alerts you will be notified about our short in the SPY daily Mon-Fri. You will get a detailed report of our current stop-loss number, number of shares held, and any other pertinent information regarding this trade and the overall market.

    Please refer to the image below for a visual breakdown of our plan for this trade.

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