U.S. markets were choppy throughout Monday’s action following reports that China was cautioning that the phase one trade agreement with the U.S. was not a deal at all, but simply represented progress toward a deal.

Treasury Secretary Steve Mnuchin tried to downplay that view, acknowledging that while the deal hadn’t been fully documented and signed, he viewed it as a substantial agreement which he expects to be signed before tariffs scheduled for December take effect.

The major indexes recovered from the opening weakness and showed some intraday strength before settling lower on light volume with the the bond market being closed.

Volatility fell for the 4th-straight session and is giving an ongoing bullish reading for the market after closing below a key level of support.

The Russell 2000 fell 0.4% after trading in negative territory throughout the session while tapping a morning low of 1,499.

Current and upper support at 1,500-1,485 was breached but held with a move below the latter signaling additional weakness towards 1,475-1,460 and lows from earlier in the month.

The S&P 500 slipped 0.1% following the opening pullback to 2,962.

Near-term and key support at 2,950 held with risk towards 2,925-2,900 and the 50-day moving average on a close back below this level.

The Dow dipped 0.1% after trading in a 125-point range while testing a 1st half low of 26,749.

Current and upper support at 26,800-26,600 was breached and failed to hold with a close below the latter leading to a possible retest towards 26,400-26,200 and the 50-day moving average.

The Nasdaq also edged down 0.1%, following the intraday backtest to 8,036. Upper support at 8,050-8,000 was tripped and failed to hold with a close below the latter getting 7,975-7,925 and the 50-day moving average back in focus.

Real Estate and Financials were the only sectors winners after nudging up 0.2% and 0.1%, respectively. Materials and Utilities lead sectors losers after falling 0.7% and 0.6%, respectively.

Global Economy – European markets closed lower across the board ahead of a crucial week for Brexit, while details of the partial trade accord between the U.S. and China were questioned.

UK’s FTSE 100 and the Stoxx 600 lost 0.5%. The Belgium20 and France’s CAC 40 gave back 0.4% while Germany’s DAX 30 was lower by 0.2%.

Queen Elizabeth II outlined the U.K. government’s plans for Brexit under Prime Minister Boris Johnson with the U.K. and the European Union still divided on customs arrangements. Both sides are trying to work out a deal for Britain’s departure before the October 31st deadline.

Asian markets settled higher despite weak economic news out of China along with concerns over the partial trade deal with the United States.

China’s Shanghai and Japan’s Nikkei rallied 1.2% while South Korea’s Kospi jumped 1.1%. Hong Kong’s Hang Seng added 0.8% and Australia’s S&P/ASX 200 rose 0.5%.

China’s exports fell 3.2% in September from year ago levels while imports dropped 8.5%. The total trade balance in September was $39.65 billion.

Expectations had exports denominated falling by 3% and imports to decline by 5.2% in September, with the overall trade surplus forecast at $33.3 billion.

Singapore’s central bank eased policy for the first time since 2016 and signalled that it is ready to adjust policy further amid mounting risks to the growth outlook.

The Empire State manufacturing index rose 2 points to 4 in October, after falling 2.8 points to 2.0 in September.

The employment sub-index dipped to 7.6 from 9.7, while the workweek jumped to 8.3 versus 1.7.

New orders were flat at 3.5. Prices paid slid to 23.1 versus 29.4, while prices received fell to 6.3 from 9.2.

The 6-month outlook index improved to 17.3 from 13.7, with employment rising to 14.5 from 12.1 and new orders bouncing to 23.5 from 21.9. Prices paid were steady at 42.5, with prices received rising to 21.3 from 17.

Market Sentiment – The iShares 20+ Year Treasury Bond ETF (TLT) snapped a 3-session slide after testing an intraday high of $141.51.

Lower resistance at $141.50-$142 with cleared but held with more important levels of recovery at $143 and the 50-day moving average

Current support is at $141-$140.50.

A close below the $140 level would be a renewed bearish signal with near-term risk towards $138.50-$138.

Market Analysis – The S&P 400 Mid Cap Index ($MID) had its 3-session winning streak snapped following the morning pullback to 1,902.

Upper support at 1,900-1,880 and the 50-day moving average was challenged but held with a close below the latter and the 200-day moving average being a bearish development.

Current resistance is at 1,920-1,940.

Continued closes above the latter would be a more bullish development for additional strength towards 1,960-1,980 with the mid-September peak at 1,976.

RSI is flatlining with support at 50.

A close below this level would signal additional weakness towards 45-40 and the latter representing the early monthly low. Resistance is at 55-60.

The Materials Select Sector (XLB) fell for the 1st time in 4 sessions after testing an intraday low of $56.91. Near-term and upper support at $57-$56.75 was tripped and failed to hold.

A close below the latter and the 50-day moving average reopens downside risk towards $56.50-$56.

Resistance is at $57.50-$57.75.

Continued closes above the $58 level would be a renewed bullish signal with upside potential towards $58.50-$59.

RSI has leveled out with support at 50.

A move below this level could lead to additional weakness towards the 45-40 area. Resistance is at 55-60.

We are allocating the portfolio as follows:

Long 25% in XLP closed on Monday at 60.56
Long 25% in XLRE closed on Monday at 39.29
Long 25% in XLU closed on Monday at 63.51
Short 25% in XLE closed on Monday at 57.86

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

XLP – 20DEC $62 Strike Price CALL (Expires December 20, 2019)
XLRE – 21FEB $40 Strike Price CALL (Expires February 21, 2020)
XLU – 17JAN $65 Strike Price CALL (Expires January 17, 2020)
XLE – 20DEC $57 Strike Price PUT (Expires December 20, 2019)

All the best,
Roger Scott.