U.S. markets showed continued strength on Thursday following news that China will refrain from retaliating to the extra 5% tariff on $300 billion in Chinese goods imports. Additionally, China’s commerce ministry said September trade talks are still on the table and that the U.S. and Beijing have maintained effective communication on trade.

The mini breakout helped the major indexes push the tops of the month-long trading ranges but are still showing losses of roughly 2% for August with the small-caps down 5%.

Volatility eased for the 2nd-straight session but remains slightly elevated ahead of the upcoming 3-day weekend with a bearish technical outlook heading into September.

The Russell 2000 zoomed 1.6% following the second half run to 1,498.

Mid-month and lower resistance at 1,500-1,515 was challenged but held with a close above the latter and the 200-day moving average signaling additional strength towards 1,530-1,545 and the 50-day moving average.

The Nasdaq surged 1.5% after reaching a late session high of 7,992.

Near-term and lower resistance at 7,950-8,000 was cleared and held with a close above 8,050 and the 50-day moving average being a more bullish signal for a trip towards 8,100-8,150.

The S&P 500 soared 1.3% following the intraday push to 2,930 and close back above the 2,900 level.

Current and lower resistance at 2,925-2,950 was cleared but held by a half-point with a move above the latter and the 50-day moving average signaling additional strength towards 2,975-3,000.

The Dow also jumped 1.3% after testing a midday peak of 26,408 while closing above the 26,000 level for the 2nd-straight session.

Prior and lower support at 26,400-26,600 was cleared but held with a close above the latter and the 50-day moving average getting 26,750-27,000 back in focus.

Technology and Industrials led sector strength after rallying 1.7% while Communication Services gained 1.6%.

There was no sector weakness.

Global Economy – European markets closed higher across the board on economic news the French economy outpaced the broader eurozone’s output.

France’s CAC 40 soared 1.5% and Germany’s DAX 30 jumped 1.2%. The Belgium20, the Stoxx 600 and UK’s FTSE 100 rallied 1%.

France’s economy grew 0.3% in the second quarter, unchanged from the previous three months, and revising the figure up from a provisional estimate of 0.2%.

Meanwhile, European Central Bank policymaker Klass Knot said he saw no reason for quantitative easing to be resumed in the region.

Asian markets were mixed as traders continued to watch the yield curve in U.S. bonds, which inverted further in the overnight session.

South Korea’s Kospi fell 0.4% while Japan’s Nikkei and China’s Shanghai slipped 0.1%.

Hong Kong’s Hang Seng rose 0.3% and Australia’s S&P/ASX 200 edged up 0.1%.

Initial jobless claims rose 4,000 to 215,000, matching estimates, after falling 10,000 to 211,000 previously. This left the 4-week moving average at 214,500, down from 215,000.

Continuing claims rebounded 22,000 to 1,698,000 following the 52,000 drop to 1,676,000 previously.

Q2 GDP was nudged to a 2% growth rate, versus the 2.1% clip from the Advance report.

Estimates were for a print of 1.9%. Personal consumption expenditures were bumped up to 4.7% from 4.3%, while business spending was -1.1% from the previous -0.8%. Government consumption was revised to a 4.5% clip last quarter, versus 5% initially.

Inventories subtracted -$47 billion versus -$44.3 billion previously. Net exports subtracted -$38.5 billion, revised from -$34.7 billion.

The chain price index was steady at 2.4% previously, while the core rate slipped to 1.7% from 1.8%.

July Advance goods trade deficit narrowed slightly to -$72.3 billion from -$74.2 bIllion in June.

Exports rose 0.7% to $137.3 billion, slightly up from the 2.7% drop to $136.5 billion, while imports fell 0.4% to $209.7 billion, extending June’s 2.1% slide to $210.6 billion.

Wholesale inventories increased 0.2% in July after an unchanged June reading while retail inventories climbed 0.8% following the prior 0.3% dip.

Pending Home Sales declined 2.5% to 105.6 in July, missing expectations of 106.2, and largely unwinding the 2.8% rise in June to 108.3 in June.

The sales index is below the year ago level of 105.9, though bounced to a 1.7% year-over-year pace versus -0.6% previously. Declines were broadbased across the four regions covered.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) tested an intraday low of $146.13 with upper support at $146.50-$146 getting breached but holding.

A close below the latter would be a slightly bearish development for a continued backtest towards $145-$144.50.

Lowered resistance at $147.50-$148.

Market Analysis – The Russell 3000 Index ($RUA) was up for the 2nd-straight session after reaching an intraday peak of 1,717. Lower resistance at 1,720-1,735 was challenged but held.

Continued closes above the latter and the 50-day moving average would be a more bullish signal for additional strength towards 1,740-1,750 with the latter representing mid-July support.

Current and rising support is at 1,700-1,685. A close back below the latter reopens risk towards 1,675-1,660.

RSI is back in an uptrend after clearing resistance at 50.

Continued closes above this level would signal additional strength towards 55-60. Support is at 45-40 with a move below the latter reopening weakness towards 35-30.

iShares MSCI Emerging Markets (EEM) has been in a month-long trading range between $38.75-$40.25 with Thursday’s high reaching $39.91.

Near-term and lower resistance at $39.75-$40 was cleared and held. A close above the $40.50 level would be a more bullish signal near-term selling pressure has abated.

However, the 50-day moving average remains on track to fall below the 200-day moving average.

This would form a death cross and is a technical indicator for possible lower lows down the road.

Current support is at $39.50-$39.25.

A close below $38.50 would signal a breakdown out of the current trading range with risk towards $38-$37.50 and the 52-week low at $37.58.

RSI is in an uptrend with resistance at 50.

Continued closes above this level would signal additional strength towards 55-60 and mid-July highs. Support is at 45-40.

We are allocating the portfolio as follows:

Long 20% in XLK closed on Thursday at 79.55
Long 30% in XLP closed on Thursday at 60.80
Long 30% in XLU closed on Thursday at 62.49
Short 20% in XLE closed on Thursday at 57.53

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

XLK – 20DEC $80 Strike Price CALL (Expires December 20, 2019)
XLP – 20DEC $60 Strike Price CALL (Expires December 20, 2019)
XLU – 20DEC $61 Strike Price CALL (Expires December 20, 2019)
XLE – 18OCT $56 Strike Price PUT (Expires October 18, 2019)

All the best,
Roger Scott.