After a brief mini-correction stock indexes are rallying, laying the groundwork for a bull flag, reports Bill Baruch.
E-mini S&P (ESH)
Yesterday’s close: Settled at 3353, up 27.50
Fundamentals: U.S benchmarks are roaring higher. We said it here yesterday, the S&P 500 is laying the groundwork for a bull-flag pattern upon a move and close above 3337.50. Despite what was arguably shaky ground Sunday night and ahead of U.S hours, buyers stepped in strongly at the opening bell. Certainly, reports that Foxconn Technology (XTAI), known as the world’s largest contract electronics maker and main Apple (AAPL) supplier, was cleared to reopen Tuesday in Zhenzghou and Shenzhen added a tailwind of relief. However, in hindsight, investors clearly took a more cautious approach ahead of the weekend in lieu of the Coronavirus and were ready to jump back in at the onset of a new week. To put this in perspective, Apple was down nearly 2% premarket and clawed back throughout the session to finish +0.47%. Although the Coronavirus has now taken the lives of more than 1000, China is forging ahead.
The reopening of factories is crucial as we approach midway through first quarter. The country is expected to expand by only 4.5% over these three months (versus 6% expected), but as we have noted many times in recent weeks; any anticipation of smoothing out the year would act as a bullish factor. The economic calendar picks up today as Federal Reserve Chair Powell begins his two-day Congressional testimony at 9:00 am CST. Amid a “patient” policy approach, two hot topics will certainly be the Coronavirus and the Fed’s added liquidity. Ironically, the latter may be the tail wagging the dog. The Fed’s balance sheet has risen to $4.166 trillion as of February 3rd, a 10% increase from the September 2019 trough and levels last seen in October 2018 just ahead of the short-lived market collapse. Any indication for continued liquidity injections will support the stock market. In fact, the massive injections by the People’s Bank of China, $129 billion in recent weeks, coupled with that from the Fed and solid earnings is all that is needed to explain this stock market strength. Will central banks keep this up?
Technicals: The NQ completed a textbook bullish engulfing daily bar yesterday and for that matter, so did the S&P. Each index opened and quickly traded lower Sunday night before reversing sharply and closing out above the previous session’s high. Now, The NQ blew right through every other high, whereas the S&P did not set a fresh record until today’s session. However, the S&P also played out the bull-flag pattern we pointed to here yesterday. We believe the S&P and NQ are bullish and there is no argument here. Does that mean there are no headwinds? Absolutely not. The Dow and Russell 2000 each reversed sharply yesterday also but made less enthusiastic strides back into Friday’s session. Obviously, there are some fundamental hurdles mentioned above, but we also want to see the Dow participate if this is going to be unarguably the next bull-leg higher. As for the Russell 2000, we have noted here in recent weeks we like fading rallies here.
In the S&P, major three-star support now comes in at 3334.50-3337, the level in which defined our bull-flag breakout yesterday.
Crude Oil (CLH)
Yesterday’s close: Settled at $49.57, down 75¢
Fundamentals: Crude oil settled at a new swing low yesterday, the lowest in 13 months, but price action is firming up into U.S hours. Expectations that Coronavirus crushed Chinese demand by at least 3 million barrels per day (bpd) has completely diminished OPEC’s hopes of avoiding a supply glut at the turn of the year. Speaking of OPEC, they are in a state of paralysis awaiting Russia to complete their analysis on whether additional cuts are necessary. A coalition within OPEC+ led by Saudi Arabia has proposed a 600,000-bpd cut to offset China’s weakness. Inventory data is coming into the picture later today and early estimates are for a build of 2.913 million barrels of crude. Still, U.S stocks set daily record highs and an upbeat risk-environment is working to buoy the battered energy sector.
Technicals: Although crude settled at a new low, it did not trade to one holding $49.31 set last week. Price action is out above our momentum indicator.
Gold (GCJ)
Yesterday’s close: Settled at $1,579.5, up $6.10
Fundamentals: Gold is trading healthily but is struggling to hold yesterday’s ground given that equity markets are surging to new record highs once again. Today’s session will be fundamental given that Fed Chair Powell begins his two-day Congressional testimony at 9:00 am CST. JOLTs Job Openings data is also due then. Powell will certainly be asked about the Fed’s added liquidity, a topic discussed in our S&P section. This overall theme has supported Gold amid a rising Dollar and surging equity market.
Technicals: Gold stuck its nose out above key resistance at $1,574 to $1,578.2 but is struggling to hold gains. Given our rising momentum indicator and yesterday’s settlement we broke this key resistance up.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com. Please sign up for at Blue Line Futures to have our entire technical outlook, actionable bias and proprietary levels emailed to you each morning.
Bill Baruch joined CNBC’s Trading Nation to talk auto stocks in this don’t miss interview.
