U.S. markets showed continued weakness on Tuesday after the Trump administration published a new blacklist of Chinese companies, prompting China to hint about possible retaliation.

The 28 Chinese companies were cited for their role in Beijing’s repression of Muslim minorities in northwest China.

The “Entity List” bars Chinese companies, or other entities, from buying parts and components from U.S. companies without U.S. government approval and comes ahead of trade talks scheduled to start on Thursday.

The major indexes held near-term support levels but the rise in volatility continues to be a major concern.

The Russell 2000 stumbled 1.7% after closing on its late day low of 1,472.

Current and upper support at 1,480-1,465 was breached and failed to hold with a move below the latter signaling additional weakness towards 1,450 and the late August low.

The S&P 500 sank 1.6% following the pullback to 2,892 into the closing bell.

Near-term and upper support from the start of the month at 2,900-2,875 was breached and failed to hold with risk towards 2,850 and the 200-day moving average on a move below the latter.

The Nasdaq was lower by 1.7% after also settling on its session low of 7,823.

Upper support at 7,850-7,800 was breached and failed to hold with a close below the latter getting 7,750-7,700 and the 200-day moving average back in focus.

The Dow dropped 1.2% following the afternoon pullback to 26,139.

Current and upper support at 26,200-26,000 was challenged and folded with a close below 25,900 and the 200-day moving average being a bearish development for a retest of the August lows to the 25,600-25,400 area.

There was no sector strength for the 2nd-straight session. Financials and Healthcare paced sector laggards after tanking 2% and 1.9%, respectively, while Technology and Materials fell 1.8%.

Global Economy – European markets settled lower following reports that Brexit talks are close to breaking down in Europe.

France’s CAC 40 lost 1.2% while Germany’s DAX 30 and the Stoxx 600 declined 1.1%. The Belgium20 gave back 1% and UK’s FTSE 100 was off 0.8%.

U.K. Prime Minister Boris Johnson said a trade deal is essentially impossible if the EU stands by its demands. Meanwhile, European Council President Donald Tusk sent a public tweet to Johnson, warning him that the future of Europe and the UK was at risk.

Asian markets showed strength despite rumblings Chinese officials are growing hesitant to pursue a broad trade deal with the United States.

South Korea’s Kospi soared 1.2% and Japan’s Nikkei jumped 1%. Australia’s S&P/ASX 200 gained 0.5% while Hong Kong’s Hang Seng and China’s Shanghai climbed 0.3%.

China’s Caixin/Markit Services PMI fell to 51.3 in September, the weakest since February, and below the 52.1 reading in August.

China’s official nonmanufacturing purchasing managers index, which includes the construction sector, edged down to 53.7 in September from 53.8 in August.

NFIB Small Business Optimism Index declined 1.3% to 101.8 in September, missing forecasts for a print of 102, and follows the 1.5% drop in August to 103.1.

The percentage of those expecting a better economy slid to 9% from 12%. Plans to higher dropped to 17% to 20%, and those expecting higher selling prices fell to 8% from 12%. Also those expecting positive earnings trends dropped to -3% from -1%.

September PPI headline and core both dropped 0.3% versus expectations for a rise of 0.2%. The 12-month headline pace slowed to 1.4% year-over-year versus 1.8% with the core decelerating to 2% versus 2.3% year-over-year.

Goods prices were down -0.4% versus -0.5% previously, with energy dropping another 2.5%, as it did in August.

Food prices rebounded 0.3% from -0.5% while services prices slipped 0.2% after rising 0.3% in August.

U.S. chain store sales declined -1.1%, after surging 5.6% in the prior week.

The 12-month pace slowed to 1.5%, from the 3.2% rate at the end of September. Unseasonably warm weather in parts of the country damped sales of fall items.

Redbook Store Sales were up 5.7% for the year in the week ending October 5th.

Market Sentiment – Fed Chairman Jay Powell reiterate the Fed will act as appropriate and is not on a preset course.

He emphasized through his prepared remarks that monetary policy will be data dependent while confirming the Fed will start expanding its balance sheet soon.

However, he stressed the growth will be for reserve management purposes and should in no way be confused with the large scale asset purchase programs that analysts deployed after the financial crisis.

Powell said the Fed will be using bills in its operations and it’s expected it will resolve the pressures, and should not materially affect the stance of monetary policy.

In the Q&A session, he was rather optimistic on the economy saying it is solid, but it’s not booming unsustainably. He noted that job growth since early in the year hasn’t been as roust as expected, and added that downward revisions to the employment numbers suggest less pressure on wages and inflation.

Powell has continued to see some slack in the labor market and said unemployment can go lower than expected without unusually strong wage gains.

He also said there is little reason for tariffs to fuel higher inflation. On the yield curve, he looks at it, but it’s just one of many tools.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 8th time in 9 sessions after testing an intraday high of $145.93. Current and lower resistance from mid-August at $145.50-$146 was cleared but held for the 2nd-straight session.

Continued closes above the $146.50 level would be a renewed bullish signal for a retest towards $148-$148.50 and all-rime highs.

Near-term support is at $145-$144.50. A close below the $144 level would be a slightly bearish development with risk towards $142.50-$142 and the 50-day moving average.

Market Analysis – The Spider S&P 500 ETF (SPY) fell for the 2nd-straight session following the pullback to $288.49 and close back below the 50-day moving average.

Prior and upper support from late August and earlier this month at $288.50-$288 was breached but held.

A close below the latter would be an ongoing bearish signal with downside risk towards $287-$285 and prior lows to start the month.

Lowered resistance is at $289.50-$290 with more important and additional hurdles at $292.50-$293.

RSI is in a downtrend with support at 40 holding by a thread.

A close below this level would signal additional weakness towards 35-30 with the latter representing the early August low. Resistance is at 45-50.

The Spider S&P Retail ETF (XRT) closed lower for the 2nd-straight session after testing an intraday low of $40.51. Upper support at $40.75-$40.50 and the 50-day moving average was breached and failed to hold.

A close below the latter reopens downside risk towards $40.25-$40 and the latter representing key support from early September.

Lowered resistance is at $41-$41.25.

Continued closes back above the $41.75-$42 area would be an more bullish development for a retest towards $42.25-$42.50 and the 200-day moving average.

RSI is in a downtrend after failing upper support at 45-40.

A close above below the latter would signal additional weakness towards 35-30 and the August lows. Resistance is at 50.

We are holding the following positions:

  1. ENPH
  2. EVRI
  3. HALL
  4. KBH
  5. KPTI
  6. SCS

Options Traders – the following regular MONTHLY options meet our criteria:

ENPH – 17JAN Expiration $25 Strike Price Call

EVRI – 20MAR Expiration $10 Strike Price Call

HALL – 17JAN Expiration $20 Strike Price Call

KBH – 17JAN Expiration $35 Strike Price Call

KPTI – 20DEC Expiration $12.5 Strike Price Call

SCS – 17JAN Expiration $17.5 Strike Price Call

All the best,
Roger Scott.