Bull Trap Being Sprung?

Markets gapped lower Monday but rallied to close the gap and retest the 50sma and downtrend.  The bad news for bulls is that all three major indices failed that test (or at least failed to pass it Monday).  This leaves all four (SPY, DIA, QQQ, and IWM) in a potential Dreaded-h pattern in the making.  So, the downtrend remains in effect and the key technical indicator for Tuesday.  In spite of this, Defensive sectors were out of favor all day.  Does this put us in a bull trap in progress?

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Overnight, Asian and European markets were all in the red.  This is probably due to the U.S. blacklisting 28 entities in China (prohibiting them from buying anything made in America).  This move was ostensibly made over Human Rights violations, but market analysts suspect it has more to do with adding Trade War pressure (or at least believe that is how China will interpret the move).  Adding to the market fears are reports that the UK PM had a testy call with German Chancellor Merkel, making any new Brexit deal “overwhelmingly unlikely.” This, of course, raises the risk of a No Deal Brexit.  As of 7:30 am, U.S. futures were also pointing to a significant (0.7%) gap down on the overnight news.

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On Tuesday PPI data (8:30 am) may impact markets, as inflation data may help inform FOMC action.  Fed Chair Powell will also speak again in the afternoon.  It’s worth noting that market expectations of an Oct. Fed rate cut have fallen slightly from >90% last week to 70% Monday.

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The bottom line remains to be cautious. It is very hard to swing trade the recent markets successfully until we start getting less "gaps and whiplash" and more "trend and follow-through."  Be careful chasing after one nice (or ugly) candle. However, the downtrend remains in control for now.  

Ed

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