Major Moves 

The Trump administration shocked Wall Street this morning by expanding its tariff threats to the United States' third largest trading partner: Mexico. In a controversial twist, the Trump administration is not using these tariffs as a threat in a trade dispute, like it is with China. Instead, it is using them as a cudgel to force the Mexican government to take action against migrants that are traveling through Mexico on their way to the United States.

Beginning June 10, the U.S. government will impose escalating tariffs – beginning at 5% – on all goods coming from Mexico. If the Mexican government does not address immigration concerns, those tariffs could rise as high as 25% by October, where they would remain until the administration's demands are met.

These tariffs will affect nearly $350 billion worth of goods coming from Mexico to the United States – everything from auto parts and avocados to medical instruments and Modelo. Traders are interpreting the news as a threat to economic growth – as new tariffs would raise prices for U.S. consumers, affect corporate growth, and put a drag on the U.S. economy – and they have responded accordingly.

The U.S. stock market sold off (see below), bond yields cratered around the globe, and the price of crude oil tanked. When traders expect strong global economic growth, they tend to push the price of oil higher because economic growth tends to lead to increased demand for oil. Conversely, when traders expect slow economic growth, they tend to push the price of oil lower.

Today, the price of oil continued to collapse, breaking below $54 per barrel. Today's bearish move confirms that oil has given up more than half of the gains it made from its recent low of $42.36 per barrel on Dec. 24, 2018, to its recent high of $66.60 per barrel on April 23.

The uptrending support level that served as support for the shoulders of the recent inverse head and shoulders pattern could potentially hold as support again, but we haven't seen any slowdown in the pullback yet.

Performance of crude oil futures

S&P 500

The S&P 500 continued its decline today as traders pulled their money out of stocks and moved it into the safety of bonds and other safe-haven assets. Nobody wants to get caught flat footed if the Trump administration carries through with its threat to impose tariffs on Mexican goods.

However, even though the S&P 500 fell today, it still has a number of potential support levels it must deal with if it is going to fall farther. The first is at around 2,737. This level first served as resistance in early February and then as support in early March. The next level is at roughly 2,784. This level served as resistance in mid-January before serving as support in early February. The last is at approximately 2,628. This level served as support from late October 2018 through early December 2018 and then again in late January. Watch for potential support bounces at these levels during the coming weeks.

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Performance of the S&P 500 Index

Risk Indicators – VIX

On a tumultuous day like today, you would expect to see the CBOE Volatility Index (VIX) shooting higher as traders try to process the geopolitical uncertainty that was injected into the market by the Trump administration's new Mexican tariff threats.

Surprisingly, the VIX didn't freak out. It actually closed lower than it opened after failing to break above 20 – a level the indicator broke above for five consecutive days in early May when President Trump announced Chinese tariffs were going to increase from 10% to 25%.

Perhaps this is a signal that Wall Street doesn't believe that the initial 5% tariff is actually going to be imposed on goods from Mexico. After all, we have seen myriad twists and turns in negotiations with the Trump administration in the past.

Traders hate to push stock prices lower unless they absolutely have to. With 10 days left until the imposed deadline, it appears Wall Street has some hope that the tariffs will never materialize.

I'm going to be watching that level at 20 next week. If it can hold, the stock market has a much better chance of rebounding.

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Performance of the CBOE Volatility Index (VIX)

Bottom Line – Things Could Be Worse

While today's market reaction to the Trump administration's tariff threats was certainly bearish, it could have been a lot worse. The S&P 500 didn't give up too much ground, and the VIX didn't break through resistance. These are promising signs.

Let's see how negotiations between the United States and Mexico play out during the next week. We will likely see support show up in the stock market if negotiations go well.

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