Nobody likes to fall into a trap. Yet investors may soon be falling into two traps that the stock market has potentially set up.
Let’s explore the issue with the help of a chart.
Please click here for an annotated chart of ETF S&P 500 ETF SPY, -0.14% which represents the S&P 500 Index SPX, -0.16% Please note the following:
• The chart shows two potential traps that the stock market has set up and investors are slowly falling into.
• The potential bull trap is characterized by the breakout of stock prices above the green line shown on the chart.
• The potential bear trap is shown by stock prices falling below the orange line shown on the chart.
• Only one of these two traps will become valid.
• There is no way to know with 100% certainty which trap will become valid.
• Under these circumstances, investors ought to pay attention to Arora’s Third Law of Investing and Trading: Making investing and trading decisions based on probabilities is the only realistic and profitable approach.
Read: Prepare for a ‘sell the news’ scenario once a U.S.-China trade deal is signed
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Three probabilities
In our analysis at the Arora Report, the following are the probabilities:
• Bull trap coming true: 30%
• Bear trap coming true: 45%
• Whipsaws: 25%
The highest probability is the bears getting trapped. In plain English, this means there is a 45% probability of the market going higher.
Supports and target zones
Please click here to see support and target zones. For details, please see “How to trade stocks as Trump threatens China with new tariffs.”
Stocks to watch
Stocks with little direct exposure to China, such as Google GOOG, -0.67% GOOGL, -0.69% Amazon AMZN, -0.17% and Facebook FB, -0.12% are likely to be least affected. Stocks with direct exposure to China, such as Apple AAPL, +0.02% Starbucks SBUX, +0.58% Nike NKE, +0.28% and Boeing BA, +0.71% are likely to be most affected. Semiconductor stocks, such as Intel INTC, -2.46% AMD AMD, +1.61% Micron Technology MU, -1.27% and Qorvo QRVO, +3.39% may see wild swings. Chinese stocks such as Alibaba BABA, -1.01% and JD.com JD, -0.88% may also see wild swings.
Portfolio protection
At The Arora Report, we increased portfolio protection Monday. A rebound during the day gave us advantageous fills. How could you have protected your portfolio? Start with Arora’s Second Law of Investing and Trading: Nobody knows with certainty what is going to happen next in the markets.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.