U.S. markets were slightly weak on Monday as the restart of U.S./ China trade talks and the Fed’s decision on interest rates later this week weighed on sentiment.
The blue-chips showed strength but Tech and the small-caps slacked with the Financials showing weakness and is the biggest sector in the Russell 2000.
Volatility edged up and closed back above key resistance but a level that is not overly alarming at this point.
The Russell 2000 fell 0.6% following the morning pullback to 1,565. Near-term and upper support at 1,565-1,550 held by over a half-point with a close below the latter opening up risk towards 1,535-1,520 and the 50/200-day moving average.
The Nasdaq was lower by 0.4% after trading a low of 8,247 shortly after the opening bell while closing back below the 8,300 level. Current and upper support at 8,250-8,200 was tripped but held with a close below the latter being a slightly bearish signal.
The S&P 500 slipped 0.2% after trading in an 11-point range with the session low tapping 3,014.
Current and upper support at 3,000-2,975 was breached but held on the 5th-straight close above the 3,000 level.
The Dow gained 0.1% after testing an intraday high of 27,275. Near-term and lower resistance at 27,250-27,500 was breached but held with the record high remaining at 27,398.
Utilities paced sector winners after rising 0.5% while Real Estate and Healthcare were up 0.4%.
Financials were the leading laggards after falling 0.8% while Communication Services and Consumer Discretionary were down 0.6% and 0.5%, respectively.
Global Economy – European markets settled mixed after the Confederation of British Industry (CBI) said that the EU was lagging behind Britain in its preparation for a no-deal Brexit.
UK’s FTSE 100 surged 1.8% and the Stoxx 600 nudged up a tenth-point, or 0.03%. France’s CAC 40 was down 0.2%. Germany’s DAX 30 dipped 2 points, and the Belgium20 was off a half-point, or 0.02%, for both indexes.
Asian markets were mostly weak ahead of the Bank of Japan’s two-day policy meeting and the lingering trade conflict between the country and South Korea, along with disappointing economic news out of China.
South Korea’s Kospi tumbled 1.8% and Hong Kong’s Hang Seng sank 1%. Japan’s Nikkei gave back 0.2% and China’s Shanghai slipped 0.1%. Australia’s S&P/ASX 200 rose 0.5%.
China Industrial Profits fell 3.1% in June, following a 1.1% gain in May.
The market is expecting a very dovish stance from the FOMC on Wednesday as a 25 basis point cut is basically a foregone conclusion, and the expectation for a more aggressive 50 basis point reduction has dissipated.
However, fed futures continue to price in more easing down the road, with a 1.72% effective funds rate projected for January 2020.
Much of Wall Street continues to expect just one rate cut, and the strength in U.S. data should limit further action with many of the risks that have concerned the Fed yet to materialize.
The minutes will likely continue to say, however, that the Fed is monitoring low inflation and weakness abroad.
Dallas Fed Manufacturing Survey rebounded 5.8 points to -6.3 in July, missing forecasts of -3.5, but recovering most of the 7.2 point drop to -12.1 in June.
The employment component nearly doubled to 16 from 8.8, with the workweek at 6.6 from 4.7, though wages dipped to 20.1 from 22.7. New orders edged up to 5.5 from 3.7.
Prices paid rose to 17 from 16.4, with prices received at -1.7 from 1.2. The 6-month activity index increased to 6 from -2.7, with the future jobs index at 28.2 from 20.2.
Also, new orders climbed to 31.8 from 22.3. Prices paid were 23.5 from 21.5, with prices received at 14.7 from 15.
Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) was up for the 2nd-straight session after testing an intraday high of $131.95. Upper resistance at $131.50-$132 was challenged but held on the close above the former.
Additional hurdles are at $132.50-$133 with a move above the latter being a more bullish setup for higher highs.
Near-term support remains at $131-$130.50 and the 50-day moving average.
A close below the latter and last week’s low of $130.51 would be a bearish signal for lower lows. This would also signal a breakdown out of the current 9-session trading range that has also been slightly stretched to the upside.
Market Analysis – The S&P 400 Mid Cap Index ($MID) closed lower for the 2nd time in 5 sessions despite the opening push just south of 1,984. Prior and major resistance from late April and Friday at 1,985 held in the continued attempt of a multi-month breakout.
Continued closes above the 2,000 level and prior support from October 2018 would be a more bullish signal for a run towards 2,025-2,050 with the all-time peak at 2,053.
Current and upper support at 1,975-1,955 was breached and failed to hold on the pullback to 1,971 afterwards? A close below 1,960-1,955 would be a renewed bearish development with risk towards the 1,935-1,930 area.
RSI is back in a slight downtrend after failing multi-month resistance at 65.
Continued closes above this level would signal additional strength towards 70-75 and February highs.
Current support is at 55-50 with the latter holding since early June.
Communication Services (XLC) settled in negative territory for the 2nd time in 6 sessions after trading to an intraday low of $51.17. Near-term but shaky and upper support at $51.50-$51 was breached and failed to hold.
A close below $51 would signal a false breakout with additional weakness towards $50.50-$50.
Fresh resistance is at $52-$52.50 following the previous session run to $51.87 and all-time high.
There is upside potential towards $53.50-$55 on a close above $52, depending on momentum.
To put things in perspective, however, the sector has only been trading for a year with the first day of action happening on July 30th, 2018.
RSI dipped after failing to clear major resistance at 70 last Friday and this month’s peak.
Continued closes above this level would be a bullish development for additional strength towards 75-80 and mid-April highs. Support is at 60 with a move below this level getting 55-50 back in focus.
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ADBE: +25% Allocation | $282.43 Protective Stop Loss | $344.09 Profit Objective
FB: +25% Allocation | $183.00 Protective Stop Loss | $219.45 Profit Objective
MSFT: +25% Allocation | $126.95 Protective Stop Loss | $157.95 Profit Objective
SNPS: +25% Allocation | $124.70 Protective Stop Loss | $152.56 Profit Objective
Option Traders – the following (regular monthly) options meet our criteria:
ADBE – 20SEP $320 Strike Price CALL (Expires September 20, 2019)
FB – 20SEP $205 Strike Price CALL (Expires September 20, 2019)
MSFT – 20SEP $140 Strike Price CALL (Expires September 20, 2019)
SNPS – 20SEP $140 Strike Price CALL (Expires September 20, 2019)
All the best,