Investors Remain Cautious as China Talks Resume

Stocks moved higher last week after China's Commerce Ministry announced that it accepted an invitation from the United States to resume trade talks. China's Commerce Vice Minister Wang Shouwen will meet with U.S. Treasury Department Undersecretary for Internal Affairs Davis Malpass. The meeting will be the first high-level meeting since late June.

While the market reacted positively to the news, many analysts believe that a breakthrough is unlikely given the growing divide over the trade imbalance and the realization that the confrontation has become more political than economic. The United States is expected to impose another $16 billion of tariffs on Chinese goods this week, and China has indicated that it will retaliate.

The good news is that corporate earnings have remained very strong. According to FactSet's Earnings Insight, nearly 80% of S&P 500 companies reported a positive EPS surprise, and more than 70% reported a positive sales surprise. Blended earnings growth rates reached 24.6% for the quarter, which is the second highest pace since the third quarter of 2010. (For more, see: Stock Market Nears Longest Bull Run in History.)

Unfortunately, most S&P 500 companies (55) have issued negative EPS guidance versus positive EPS guidance (19). The 12-month forward P/E ratio of 16.6x is also higher than the five-year average of 16.2x and the 10-year average of 14.4x. These indicators suggest that stocks could see a bit of a correction, especially given the risk of an escalating trade war.

Next week, traders will be closely watching several key economic indicators, including the FOMC minutes on Aug. 22, jobless claims and new home sales on Aug. 23, and Fed Chair Jerome Powell's comments on Aug. 24. China's response to potential U.S. tariffs on Aug. 23 will also be closely watched by the market given the potential for further trade disruption.

Broad Market Remains Range Bound

The SPDR S&P 500 ETF (SPY) moved higher last week within a price channel that has been in place since early April. Traders should watch for a move higher to retest upper trendline and R1 resistance at $287.39 or a move lower to retest pivot point and 50-day moving average support at $278.77. Looking at technical indicators, the relative strength index (RSI) appears relatively neutral with a reading of 59.89, but the moving average convergence divergence (MACD) could see a near-term bullish crossover. (See also: Goldman Sachs Sees S&P 500 at 2,850 at Year's End.)

Industrials Recover from Breakdown

The SPDR Dow Jones Industrial Average ETF (DIA) rebounded from its pivot point and 50-day moving average at $249.43 last week to retest its reaction highs. Traders should watch for a breakout from trendline resistance to R1 resistance at $259.25 or a breakdown from these levels to retest the pivot point and 50-day moving average levels at $249.43. Looking at technical indicators, the RSI appears a bit lofty at 62.79, but the MACD could see a near-term bullish crossover.

Tech Stocks Approach Key Support

The Invesco QQQ Trust (QQQ) moved lower last week toward key trendline and 50-day moving average support levels at $177.33. Traders should watch for a breakdown from these levels toward S1 support at $169.77 on the downside or a rebound to retest R1 resistance at $183.03. Looking at technical indicators, the RSI appears neutral at 52.81, while the MACD has been trending sideways throughout most of the month. (See also: Why Alibaba, Tencent, Baidu Can Rise 20%.)

Small Caps Approach Key Decision Point

The iShares Russell 2000 ETF (IWM) shares moved slightly higher last week but remained within a tight trading range inside of an ascending triangle chart pattern. Traders should watch for a breakout from upper trendline and R1 resistance at $169.86 or a breakdown from lower trendline, 50-day moving average and pivot point support at around $166.00. Looking at technical indicators, the RSI appears neutral at 55.06, but the MACD continues to trade sideways.

Charts courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.