Financial news and media have been reporting on the ongoing trade tensions between the United States and China for quite some time. However, whilst things like trade tariffs are widely spoken about in the public domain, there is a hidden battle that has started to impact the US stock market – especially technology stocks.
The New Cyber War & Big Hack
A report by Bloomberg suggests that China has used tiny microchips to infiltrate US companies such as Apple and Amazon. According to the report, it all started with Amazon doing their due diligence for a highly secure cloud that Amazon Web Services (AWS) was building for the CIA.
After a third party ran some tests, they found a tiny microchip in the AWS server units that was not on the original motherboard’s design. The microchip was developed by San Jose tech company Super Micro Computer Inc, which is the world’s biggest supplier of server motherboards and is active in CIA drone operations and in the networks of US Navy warships.
The report suggests it was Chinese military spies that infiltrated the Super Micro Computers manufacturing centers in China, with over 30 American corporations believed to have been infected.
How Did The Market Respond?
The market responded accordingly and on the 4th October, the same day the report was published, the Nasdaq 100 experienced a sharp drop in price as highlighted by the blue box below:
Source: Admiral Markets MT4 NQ 100 – Data range: from 6 August 2018 to 8 October 2018 – performed on 8 October 2018 at 10:21 AM BST
Why did the Nasdaq 100 experience such a big impact to the news report? One of the major reasons is that the Nasdaq 100, or NQ100 on the Admiral Markets platform, is made up of the largest one hundred technology companies listed on the Nasdaq exchange in New York.
The index is produced by taking a weighted average of price of all the companies within it, including:
- Alphabet (Google)
Trading the Volatility of the US Stock Market
According to a report by American news and information website, Axios, the leaked news of China’s infiltration came direct from the White House. Most importantly, the sources suggest there is more to come as they plan to launch a major, administrative-wide broadside against China.
This makes it an interesting time to trade the volatility of the US stock market. But, is trading stocks and shares different to any other market like foreign exchange or commodities? In some ways there are differences but in many ways there are not.
For example, simple price action patterns have the same effect across all markets. That’s because these patterns are developed using the open, high, low and close of a specific time period of an instrument. Let’s take a look at the daily chart of Amazon to demonstrate:
Source: Admiral Markets MT4 AMZN – Data range:13 August 2018 to 8 October 2018 – performed on 8 October 2018 at 10:53 AM BST
We can see that the price initially struggled to break through the $2007.70 price level at the first touch of the horizontal black line on 13 September. The market came back to the same price level on 27 September and struggled, yet again.
However, it is the price action pattern on the 1 October that will be of most interest to price action traders. This is because it is known as bearish pin-bar reversal pattern in which traders would be looking for price to move lower after such a formation.
Trading this particular type of price action reversal pattern could have resulted in selling, or shorting the stock.
The Entry, Stop Loss, Target & Risk
A possible entry level could be below the low of the bar, with a stop loss level above the high. In the example of the Amazon pin bar, this would have resulted in an entry price at USD 2,003.35 and a stop loss price at USD 2,032.98.
With a total risk of USD 29.63 (2,032.98 – 2,003.35), trading 10 lots would have resulted in a loss of approximately USD 296.30. Targeting USD 1,875.00, the previous swing low on the daily chart, would have resulted in a profit of approximately USD 1,283.50 on 5 October.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.