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S&P 500 Faces Key Resistance, Crude Rebound Needs Fuel & China Buying Gold

01/11/2019 11:55 am EST

Focus: MARKETS

Bill Baruch

President and Founder, Blue Line Futures

The S&P is facing the 2600 hurdle, Crude needs a fresh catalyst to hold $50 and China is adding to gold reserves writes Bill Baruch.

The dollar consolidated higher Thursday. What did Fed Chair Powell actually say? We look to data from Japan & Australia Thursday night and a big read on U.S. CPI Friday. What are the trading levels to know? How are we trading it?

E-mini S&P (March)

Thursday’s close: Settled at 2594, up 11.50.

Fundamentals: U.S. benchmarks are holding firm near the top-end of their recent range with the S&P (SPX) facing the psychological hurdle at 2600 and what’s just above it. Thursday, Fed Chair Powell continued to paint a patient and flexible rhetoric on hiking interest rates next. However, he pointed to momentum in growth carrying from last year. He is not wrong, growth only dipped in December. Three’s a trend, the next 30 to 60 days will be picked apart.

Doubling down, he said he sees the Fed’s balance sheet substantially smaller. Equity markets initially did not like that comment but were able to battle back before close. The Fed’s path of tightening faces a key test today with U.S. Consumer Price Index (CPI) coming out. We watch the core read most closely and this has not signaled that inflation is running away. In fact, on a year-over-year basis, it has come in shy of expectations for three of the last four months and has only beaten it twice in the last year. The month-over-month level (0.3%) has not seen extreme growth since last January.

xpectations for today’s results come in at 2.2% year-over-year and 0.2% for the month.

Headline risks persist with everything from U.S.-China trade to Brexit and the government shutdown facing its fourth week. The S&P 500 has gained for four straight sessions, but has not altered the technical picture. We maintain our viewpoint that this run is tiring and is within 1% of its exhaustion point in the near-term.

Technicals: The S&P settled within our key resistance pocket of 2592-2596.75 Thursday after trading to a high of 2599.50; the psychological 2600 barrier remains elusive, but more importantly we have major three-star resistance overhead at 2603-2609.50. Depending on your conviction level, you do not want to tip-toe around and wait for a direct test to resistance without having any short exposure on or not getting out of longs.

Crude Oil (February)

Thursday’s close: Settled at $52.59, up 23¢.

Fundamentals: WTI traded to an overnight high of $53.31 as it attempts to post gains for the ninth straight session. Our narrative has not changed; we need a fresh catalyst to hold $50. Such can easily come one of three ways: Most importantly, Domestic stockpiles must shrink. Crude has battled in the face of bloating storage of its own and within the products.

Furthermore, Cushing has added for 15 out of the last 16 weeks. Additional jawboning from OPEC or Saudi Arabia could feed the recovery’s appetite. Saudi Arabia announced this week they would slash exports, and this should trickle into U.S. inventory data and they doubled down saying fresh action from OPEC might be necessary. Lastly, a flat-out trade deal between the U.S. and China would bring a massive tailwind to risk-sentiment. Baker Hughes rig count data is due at 1 pm EDT.

Gold (February)

Thursday’s close: Settled at $1,287.40, down $4.60.

Fundamentals: Gold traded to a high of $1,295.70 and CPI data Friday was right in-line with expectations. This should leave the technicals in control with another lower high for the metal on the chart.
We have pounded the table that we prefer to capitalize on strength and even such there has been multiple swings this week to buy first key support and sell against strong resistance. The U.S. Dollar Index (DXY) is unchanged and today’s close will also bring technical importance. While the dollar is unchanged, it does not include the Chinese yuan (CNY) which has gained 1.5% on the week against the dollar and is trading at its strongest level since July 26. This has provided a tailwind for gold to start the year and furthermore, China added to its gold reserves in December for the first time since October 2016.

Lastly, traders should keep a pulse on risk-sentiment, it’s ok if the Dollar Index holds ground, if equity markets show weakness or Treasuries recover from a recent move lower; this would bring support to gold.

FX Rundown video for Jan. 10-11 here.

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