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Encouraging news from the China trade negotiations buoyed the market this week. The Standard and Poors 500 Index (SPX) opened Monday at 2944, but declined on Monday and Tuesday to a closing low on Tuesday of 2893. Then the bulls started hearing positive rumors from the China trade negotiations and the market rallied the balance of the week, with SPX closing Friday at 2970, up 2.7% from Tuesday’s close. Don’t get too excited yet. SPX gapped open Friday morning and traded as high as 2993, before fading into the close at 2970. This resulted in the classic “evening star” candlestick on Friday. This was matched in the Nasdaq 100 and the Nasdaq Composite, but less so for the Dow or the Russell 2000 indices. The evening star often signals the top of a bullish trend, predicting a possible bearish reversal. Watch the trading closely next week to confirm this signal. Trading volume in the S&P 500 companies ran below average all week and barely made it up to the 50-day moving average (dma) on Friday. The lower volume continues to stand as a caution flag for this market. The bulls are buying, but they are also taking profits.

VIX, the volatility index for the S&P 500 options, spiked back up to 20.3% on Tuesday’s bearish price action, but traded lower the balance of the week, closing at 15.6% on Friday. This is a borderline level of volatility. Remain circumspect.

The Russell 2000 Index (RUT) tried to match recent lows on Tuesday’s market weakness, but bounced back the rest of the week, closing at 1512 on Friday. Friday’s price action broke out above the 50 dma at 1512 and then touched the 200 dma at 1527 before pulling back to close at the 50 dma. Russell’s bearish trend for the past several months remains a significant cautionary sign for the overall market.

The NASDAQ Composite index mimicked the S&P 500 price action this week, trading much higher after Tuesday’s down day, gapping open Friday morning, trading through the 50 dma, and closing up 106 points at 8057. The cautionary news is that the intraday high was one hundred points higher at 8116. NASDAQ trading volume was below average all week, but managed to break the 50 dma on Friday.

This week was typical of recent market activity with wide swings almost daily, based on the latest rumors and/or news (although it is often difficult to distinguish the two). Tuesday’s trading looked ugly, but then the market stabilized, traded higher Wednesday and Thursday, and then turned in a large gap opening higher Friday morning. All the financial news anchors were euphoric. Recall that they were all repeating “manufacturing recession” ad nauseum last week.

Encouraging reports from the trade negotiations with China helped turn the tide in the market this week, but Friday’s fade late in the day underscores traders’ nervousness. They took profits when given the chance. Don’t let Friday’s price action get you too excited. We may not have seen the worst of this market and I expect the volatility will continue. This week’s optimism was based on reports of positive progress in negotiations with China, but that could easily be overturned by next week’s news.