U.S. markets showed continued choppiness on Wednesday following disappointing earnings from a couple of Dow components and ongoing geopolitical news. President Trump announced that he is lifting sanctions on Turkey after the country said they will be ending combat and imposing a permanent ceasefire in Syria.

The tight trading ranges led to slightly higher closes for the major indexes with the overall market still showing signs of breaking out to higher highs.

However, if the double-tops from July and September aren’t cleared over the near-term, another pullback to previous support levels seems certain.

The S&P 500 rose 0.3% while closing on its session peak of 3,004. Lower resistance at the 3,000 level was cleared and held to keep upper resistance at 3,025 and the July record peak at 3,027 in focus.

The Dow advanced 0.2% after testing an intraday high of 26,896. Near-term and lower resistance at 26,800-27,000 was recovered with a close above the latter getting 27,200-27,400 and fresh all-time highs back in play.

The Nasdaq also added 0.2% following the first half push to 8,122. Near-term and lower resistance at 8,100-8,150 was cleared and held with more additional hurdles at 8,200-8,250 and the mid-September high at 8,243.

The Russell 2000 edged up 0.1% after tapping an intraday high of 1,554. Lower resistance at 1,560-1,575 was challenged but held with a close above the latter getting 1,585-1,600 back in play.

Energy and Communication Services were the strongest sectors with gains of 0.8% while Healthcare and Materials were higher by 0.6%. Consumer Discretionary showed the most sector weakness after falling 0.5% while Industrials were marginally lower after slipping 0.01%.

Global Economy – European markets settled mixed after UK lawmakers voted in principle for Prime Minister’s Boris Johnson’s Withdrawal Agreement Bill to proceed through parliament, but rejected his plans to get it approved within 3 days.

UK’s FTSE 100 rallied 0.7% and Germany’s DAX 30 rose 0.3%. The Stoxx 600 nudged up 0.1%. The Belgium20 was down 0.2% and France’s CAC 40 dipped 0.1%.

Asian markets also closed missed following news that the PBOC slashed the rate for the onshore yuan and injected further liquidity. Meanwhile, reports that China is preparing to replace Hong Kong CEO Carrie Lam caught attention and weighed on sentiment.

Hong Kong’s Hang Seng sank 0.8% while South Korea’s Kospi and China’s Shanghai fell 0.4%. Japan’s Nikkei climbed 0.3% and Australia’s S&P/ASX 200 was up less than a point, or 0.01%.

MBA Mortgage Applications sank 11.9%, after edging up 0.5% in the prior week. This breaks a string of three consecutive weekly gains, though the index is still up 53.6% year-over-year.

Most of the weakness was in the refi index, which fell 17.1% after cumulative gains of 27.6% over the prior three weeks.

The purchase index declined another -3.6% following a -4.1% slide in the prior week, and represented the 3rd-straight weekly drop. The 30-year fixed rate rose back over 4% to 4.02% from 3.92% in the prior week. The 5-year ARM slid to 3.29% from 3.37%, and was at 4.47% a year ago.

FHFA House Price Index rose 0.2% in August to 277.4 after July’s 0.4% increase to 276.9. The index is up 4.6% year-over-year, slowing slightly from 5% in July.

Gains were seen in 5 of the 9 regions, led by New England (0.9%), with three sections posting declines, led by the East South Central (-0.8%). The Pacific was unchanged.

However, the 12-month changes were all positive for the 9 areas covered, ranging from 3.9% in the Middle Atlantic and Pacific divisions to 6.5% in the Mountain division.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session with Wednesday’s high reaching $140.31. Prior and lower resistance at $140-$140.50 was cleared but held.

Continued closes above the $141 level would be a slightly bullish signal for a possible retest towards $142-$142.50 and the 50-day moving average.

Support remains at $139-$138.50.

Market Analysis – The S&P 400 Mid Cap Index ($MID) showed strength after trading to an intraday high of 1,950. Near-term and lower resistance from early September at 1,950-1,970 was cleared but held.

Continued closes above the 1,975 level and the mid-September peak at 1,976 would be a bullish signal for a retest towards 1,980-2,000 and fresh all-time highs.

Current and key support is at 1,940. A close below this level would be a slightly bearish signal for a backtest towards 1,930-1,910 and the 50-day moving average.

RSI is flatlining with support at 55-50.

A close below the latter would signal additional weakness towards 45-40 and the latter representing the early monthly low.

Resistance is at 60 and the September peak with a move above this level signaling strength towards 65-70.

The Consumer Staples Select Spiders (XLP) extended its winning streak to 6-straight sessions following the intraday push to $61.28. Near-term and lower resistance at $61.50-$62 was challenged but held.

A close above the latter and the September all-time high at $61.92 would be an ongoing bullish signal with blue-sky potential towards $63-$63.50.

Current support is at $60.75-$60.25 and the 50-day moving average.

A close below the latter would be a slightly bearish signal with downside risk towards $60.25-$59.75 and prior lows from the start of the month.

RSI is in an uptrend with resistance at 60.

Continued closes above this level would signal additional strength towards 65-70 and the latter representing the July high. Support is at 55-50.

We are allocating the portfolio as follows:

Long 30% in XLF closed on Wednesday at 28.54
Long 20% in XLK closed on Wednesday at 80.75
Long 30% in XLU closed on Wednesday at 64.60
Short 20% in XLE closed on Wednesday at 59.29

Option Traders… the following regular MONTHLY options meet our criteria:

XLF – 20DEC $28 Strike Price CALL (Expires December 20, 2019)
XLK20DEC $82 Strike Price CALL (Expires December 20, 2019)
XLU17JAN $63 Strike Price CALL (Expires January 17, 2020)
XLE17JAN $58 Strike Price PUT (Expires December 20, 2019)

All the best,
Roger Scott.