Everything was setting up well on Friday. The stock market was in rally mode with major U.S. indices climbing almost 1% after a much stronger-than-expected jobs report. Small caps were starting to break out and investors went into the weekend with momentum in their sails.
Then the president tweeted on Sunday night.
President Trump sent a two-tweet update on the trade war with China, saying he plans to increase certain 10% tariffs to 25% on Friday. He added that another "untaxed" $325 billion worth of goods would also see a 25% tariff as well.
Trump later added to his stance on trade -- having likely seen the futures market in the red -- and tweeted on Monday morning.
The United States has been losing, for many years, 600 to 800 Billion Dollars a year on Trade. With China we lose 500 Billion Dollars. Sorry, we're not going to be doing that anymore!— Donald J. Trump (@realDonaldTrump) May 6, 2019
Are trade wars fun? No. Do they make investing and trading easy? Of course not.
Seeing Apple (AAPL - Get Report) down 3.5% Monday or Alibaba (BABA - Get Report) drop 5% at the open isn't fun. If you're trading Advanced Micro Devices (AMD - Get Report) , Nvidia (NVDA - Get Report) or Micron (MU - Get Report) , a 4% to 5% gap down isn't what you want to wake up to on a Monday.
Many are worried about what the stock market is going to do now with so much selling hitting investors at the open. Let's take a closer look a few charts to see how we're setting up.
Trading the S&P 500
The S&P 500 is doing a good job absorbing the news on Monday so far. It's clear that the index will lose its short-term channel (shown in purple) that it's been trading in since the first day of April. That doesn't mean the rally is over, though.
The S&P 500 is still holding uptrend support (blue line) and is clinging to the 20-day moving average. If the market can hold uptrend support at its lows on Monday and close over the 20-day, many bulls will consider that a victory. Should it continue to rally, I would like to see the S&P 500 reclaim its Fed day lows at 2,923. Can we close above this mark on Monday? How about Tuesday or Wednesday, and even if we can, will the index hold this level? These are all things to consider moving forward.
So far the market is holding up pretty well, but that does not mean that it will continue to do so. Should we lose Monday's morning lows -- which are at 2,898 by the way -- that 2,850-ish level will be the next line in the sand. This area houses March resistance and April's gap-up level. It also has the 50-day moving average at 2,854.
Don't Forget About Small Caps
Before Monday's open, it looked like this breakout would be ruined by the seemingly escalated trade war. Shortly into the session though, there's plenty of hope for those who are long small caps (and for those who missed the breakout on Friday).
Over this $158 to $159 area and the IWM still looks attractive on the long side. Below this mark and longs may want to pare back risk. While it will look less attractive, the IWM is still technically OK as long as it holds uptrend support near $155.50 and its 200-day moving average. Below the 200-day and the IWM is a no-touch until it firms up again.
So what's the bottom line for both the S&P 500 and the IWM ETF? So far, the market is holding up better than many had anticipated. See if they can hold Monday's lows and press higher. If not, pay attention to the downside levels outlined.