U.S. markets showed weakness for the 3rd-straight Monday as chatter over the trade war with China was back in the spotlight.

President Trump again lowered hopes for a truce in the trade war with China, saying that he would be fine if trade talks scheduled for September do not happen.

The Dow was down 1.5% after testing an intraday low of 25,824.

Prior and upper support at 26,000-25,750 was triggered and failed to hold with a close below the latter signaling additional weakness towards 25,500 and the 200-day moving average.

The Russell 2000 fell 1.2% following the fade to 1,491 ahead of the closing bell. Major and upper support at 1,500-1,490 was tripped and failed to hold with a close below the latter signaling a retest towards 1,480-1,470 and the monthly low of 1,472.

The Nasdaq dropped 1.2% after testing a first half low of 7,833.

Near-term and upper support at 7,850-7,800 was violated but held with downside risk towards 7,700-7,650 on a close below the latter.

The S&P 500 also gave back 1.2% following the backtest to 2,873 and close back below the 2,900 level.

Current and upper support at 2,875-2,850 was breached but held with a close below the latter getting 2,825-2,800 and the 200-day moving average in play.

There was no sector strength. Financials were the weakest sector after sinking 1.9% while Materials and Consumer Discretionary were lower by 1.6% and 1.5%, respectively.

Global Economy – European markets showed weakness on rising risk that Italy’s government will collapse along with increasing concerns of a no-deal Brexit outcome.

The Belgium20 declined 0.8% and UK’s FTSE 100 fell 0.4%. France’s CAC 40 and the Stoxx 600 were lower by 0.3% while Germany’s DAX 30 dipped 0.1%.

Asian markets closed mostly higher despite ongoing political protests escalating in Hong Kong for the 10th-straight weekend and a situation that closely needs monitoring going forward.

China’s Shanghai jumped 1.5% while Hong Kong’s Hang Seng was down 0.4%.

South Korea’s Kospi rose 0.2% and Australia’s S&P/ASX 200 nudged up 0.1%. Japan’s Nikkei was closed for a holiday.

The U.S. Treasury Budget came in at a -$119.7 billion deficit for July, in-line with expectations. Spending rose to a 22.8% year-over-year pace, up considerably than the 9.9% prior gain.

For the 10 months of the fiscal year to date, the red ink totals -$866.8 billion versus the -$684 billion previously.

Spending is 8% higher on a year-over-year basis for the year to date, versus 4.4% in at this point in 2018.

Year-to-date receipts increased 3.4% year-over-year compared to the 1% gain last year.

Analysts are forecasting a -$955 billion deficit for fiscal 2019 with risk to the high side given the new budget agreement.

Market Sentiment – Fed funds futures are showing the September contract remains fully priced, and then some, for another quarter point easing at the September 17th, 18th FOMC meeting.

The implied rate on October stands at 1.80%, reflecting 32.5 basis points of cuts with a policy meeting on October 29th, 30th, as well. The January 2020 contract is at 1.48%, suggesting some 64.5 basis points in rate reductions by the first meeting next year on January 28th, 29th.

The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 11th time in 12 sessions following the late day surge to $143.43 and fresh 52-week peak.

New and lower resistance at $143-$143.50 was cleared but held. A close above the latter would be a bullish signal for a possible pop towards $144.50-$145.

Near-term and rising support is at $142.50-$142. A close below $141.50 would signal additional weakness towards $140.50-$140.

Market Analysis – The Spiders Dow Jones Industrial Average ETF (DIA) fell for the 2nd-straight session following the backtest $258.56. Current and upper support at $258.50-$258 held.

A close below the latter would reopen risk towards $256.50-$256.

Lowered resistance at $260-$260.50 followed by $262-$262.50.

The 50-day moving average remains in a solid uptrend with continued closes back above $266 signaling a possible near-term bottom and lowered volatility.

RSI is in a downtrend with support at 35-30.

There is risk to 25 and the monthly low on continued selling pressure. Resistance is at 40-45 with a move above the latter signaling additional strength.

The Consumer Staples Select Spiders (XLP) also closed lower for the 2nd-straight session after tapping a low of $58.72. Upper support at $59-$58.50 and the 50-day moving average was breached and failed to hold.

A close below the latter would be an ongoing bearish development with downside risk towards $58-$57.50.

Near-term and lowered resistance is at $59.25-$59.75.

A close above the latter would be a bullish signal for another push towards $60-$60.50.

RSI is rolling over after failing to hold upper support at 50-45.

A close below the latter would signal additional weakness towards 40-35 with the latter representing the prior Monday low.

Lowered resistance is at 50-55 with a move above the latter signaling additional strength towards 60-65.

We are holding the following positions:


4. LOB
5. LZB
6. WNC

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

BCOV – 18OCT Expiration $12.5 Strike Price Call

CRUS – 17JAN Expiration $55 Strike Price Call

EDIT – 15NOV Expiration $25 Strike Price Call

LOB – 20DEC Expiration $20 Strike Price Call

LZB – 18OCT Expiration $35 Strike Price Call

WNC – 18OCT Expiration $15 Strike Price Call

All the best,
Roger Scott