Equities Pick Bottom. Crude Drops, OPEC Tests. Why Isn't Gold Green?

12/06/2018 11:00 am EST

Focus: MARKETS

Bill Baruch

President and Founder, Blue Line Futures

How do you find a bottom for equities after the Tuesday selloff? Why isn’t Gold green these days? The yuan.  Bill Baruch, president and founder of Blue Line Futures, previews E-mini S&P, Gold, Crude, Forex and Treasury markets and today’s economic calendar.

 

Bill Baruch's Midday Markets short video for Dec. 6 here.

Equity markets are under pressure this morning. A buying opportunity for stocks? Resistance 2654. Oil retested $50, risk sentiment OPEC. Bullish Gold higher today, USD sold off.

Bill Baruch’s FX Rundown short video for Dec. 6-7 here.

The Dollar Index is finishing down slightly Thursday. Nonfarm Payroll is in focus; what to know for tomorrow's big read on jobs. We cover levels for the DXY, euro, yen, Aussie and CAD.

 

E-mini S&P (December)

Tuesday’s close: Settled at 2701.75, down 89.00.

Fundamentals: U.S, benchmarks and those from around the world are in turmoil this morning with a number of reasons adding to the distress. Starting with the scene of the crime Tuesday: the S&P (SPX) began to slip as tailwinds behind the U.S. and China trade truce quickly turned to doubts and President Trump’s tweet that he is a “Tariff Man” imploded those hopes.

Remember, we entered Tuesday Neutral in Bias and essentially called the run overvalued given the lack of substance behind the trade truce. The S&P sliced through major three-star support like a hot knife through butter. This level aligned the 200-day moving average and the gap from Friday’s close; when a gap gets taken out with such ferocity, you can only get out of the way. In fact, on Tuesday’s Midday Market Minute we pointed to how that action resembles the failures “after the first bounce in October,” more specifically October 18 and October 23 which ultimately led to a low of 2603.

U.S. and China relations are under additional pressure after the arrest of Meng Wanzhou, the CFO and ‘heiress’ of China’s tech giant Huawei for violating sanctions against Iran. Although she was arrested in Canada on Saturday, it was not made public until late Wednesday. She faces extradition to the U.S and this is seen as a tremendous blow to U.S and China relations.

The two other major factors playing into this weakness are Brexit and the yield curve inversion. First, Brexit is falling apart at the seams and U.K Prime Minister May does not appear to have Parliamentary support ahead of the December 11th vote. A failure to gain such will make it much tougher to achieve a deal by the March deadline and a ‘no-deal Brexit’ strikes the same fear that we initially saw back in June 2016. The breaking of this news aligns with added pressure to the market on Tuesday. Lastly, on Monday we noted here that the yield on the 5yr Treasury Note traded below that of the 3yr, inverting a small portion of the curve. This added a vicious tailwind to the curve flattening process on Tuesday with the 30yr Bond gaining nearly 3% on the week; that type of movement disrupts the flow of cash which must come from somewhere – stocks.

The selling on Tuesday cascaded as investors and funds wanted to avert risk ahead of the stock and bond market being closed on Wednesday for the national day of mourning in honor of President H. W. Bush. With things set to reopen this morning, we imagine that investors can find value more than 5% from the high of the week in the early part of the session. However, if the buying is tepid through the day we could be in store for a poor finish.

The news flow today will be critical as we look for developments on all of the abovementioned pieces to this puzzle and more.

On the economic calendar, ADP Payrolls are out. Weekly Jobless Claims, Nonfarm Productivity and Trade Balance data are all out. Services and Composite PMIs are released at 9:45 am EDT and the more closely watched ISM Non-Manufacturing along with factory orders are due at 10:00 am EDT. Traders also want to keep an eye on Crude Oil with inventory data due at 10:30 am EDT and the OPEC meeting in Vienna underway. Fed President Bostic speaks at 12:15 pm EDT and Fed Chair Powell is on the calendar this evening at 6:45 pm EDT.

Technicals: There is no way going around it, the technical damage to the chart is immense. So, where is support? First, one must understand that there is no precise level in picking a bottom when a market takes on this velocity, that is why we have major three-star support at ..

 

Crude Oil (January)

Wednesday’s close: Settled at 52.89, down 0.36.

Fundamentals: Crude has lost as much as $3 from its session high as it seems OPEC is testing the market’s reaction to various degrees of rhetoric. Considering the fear that demand growth will slow next year, we maintain that the market wants to see a cut of at least 1.3 mbpd. Early pressure is attributed to Saudi Arabia proposing a cut of only 1 mbpd. In November, they produced 11.3 mbpd which is an increase of about 700,000 bpd from October and more than 1 mbpd from their July level. A cooperated cut of only 1 mbpd means only a portion of that will come from Saudi which leaves their production surge in tact.

Furthermore, how much will come from Russia? News that Russia is not fully on board this morning has also added to pressures. We expect the anecdotes to continue from the OPEC meeting in Vienna which started today and should last into tomorrow morning U.S time.

EIA inventory data is out. A bearish API report Tuesday night (discussed here Wednesday) weighed on the market but not as much as one would have imagined given the monstrous composite build of 13.29 mb. Hopes ahead of OPEC coupled with two major pipelines from Canada shutting down allowed price action to shake off this bearish news.

Still, we imagine that it is weighing on sentiment this morning as the EIA read comes into focus. Expectations are for -0.942 mb Crude, +1.180 mb Distillates and +1.3 mb Gasoline. Any draw on the Crude front should bring a wave higher, however, a composite build anywhere in the ballpark of the API report will certainly bring the bears out it droves.

Technicals: Yesterday’s rip higher 54.44 confirmed our major three-star resistance at 54.75-55.03 and our rhetoric all week that Crude cannot breakout above here unless OPEC cuts 1.3 mbpd or more. Remember, we neutralized our Bullish Bias after Tuesday’s first failure at this level. The market precipitously in the early hours of Thursday morning, trading through the critical support levels that would define a constructive tape and once again found itself testing the psychological $50 mark and major three-star support at ... 

 

Gold (February)

Wednesday’s close: Settled at 1242.6, down 4.0.

Fundamentals: One might say to yourself this morning, “the Dollar Index (DXY) is lower, Treasury prices are firmly higher and equity markets are in a bit of turmoil, why is Gold not in the green?”
The answer here is very simple, the Chinese yuan (CNY) has trimmed its gains against the U.S. dollar (USD) on the week from about 1.75% to now only 1%. Strong doubt had begun to overshadow the substance behind this weekend’s U.S and China trade truce. The relations are under additional pressure after the arrest of Meng Wanzho, the CFO and heiress of China’s tech giant Huawei for violating sanctions against Iran. Although she was arrested in Canada on Saturday, it was not made public until late Wednesday. She faces extradition to the U.S. and this is seen as a tremendous blow to U.S. and China relations.

Although we remain unequivocally long-term bullish Gold, we have consistently said that traders must lock in gains or prepare for tomorrow’s Nonfarm Payroll report with Gold at these levels. The data comes in to focus today and the private ADP Payroll survey this morning came in lower than expected at 179k versus 196k. Weekly Jobless Claims also came in higher than expected for the third week in a row. Services and Composite PMIs are out 9:45 am EDT. The more closely watched ISM Non-Manufacturing along with factory orders are due at 10:00 am CT. Fed President Bostic speaks at 12:15 pm EDT and Fed Chair Powell is on the calendar this evening at 6:45 pm EDT.

Technicals: Gold faces major three-star resistance at ... 

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View a short video: Bill Baruch: Trading Futures. Gold, USD, yuan.

Recorded: TradersExpo Chicago July 24, 2018.
Duration: 4:34.

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