Stocks rebounds but volatility remains, writes Bill Baruch.
E-mini S&P (ESH)
Last week’s close: Settled at 2951, down 6.00 on Friday and down 388.25 on the week
Fundamentals: U.S benchmarks are ricocheting around, and volatility is showing no sign of slowing. After losing as much as 14.5% in a single week, this type of movement is to be expected; uncertainty is rampant, and markets hate uncertainty. Overnight, the S&P 500 completed a 4.5% range in the first 10 hours of trade. Friday’s 4% rip in the final 30 minutes quickly disappeared on the open last night after China’s PMIs over the weekend contracted at the worst pace on record and the first Covid-19 (Coronavirus) death in the U.S was reported. So, what now?
China’s hard data was expected to be poor to breathtakingly poor, but this did top even the worst expectations; Manufacturing PMI at 35.7 and Non-Manufacturing PMI at 29.6. The private Caixin HSBC survey was less-worse at 40.3. Coronavirus/Covid-19 has been in the news for more than a month and a half now and even the most mediocre forecasters expected the panic to hit in waves because the incubation period is up to three to four weeks. This means that even after the outbreak was widely known, those who had been in contact with someone over recent days and weeks may not have experienced symptoms until mid-February. This narrative has played out perfectly.
The global impact to the Covid-19 outbreak is still very uncertain and that is why once the data knocked the market off its one-way bullish tick of over-exuberance, traders and investors alike panicked. The panic brought a very healthy cleansing.
This brings us to the Fed, there is now a 100% probability, yes 100%, that the Federal Reserve cuts rates by 50 basis points at their March 18 meeting. Furthermore, there is a 75% probability they cut another 25 basis points by April 29. With such certainty priced in, it becomes more and more likely they could act if data this week is as bad as, or worse than, that Services PMI read almost two weeks ago. Coming up at 9:00 am CT is February ISM Manufacturing, expected 50.5. Remember, although Manufacturing PMI (a separate survey) missed expectations it did not cross into contraction; the final February read is due out at 8:45 and expected at 50.8. If this number comes in much worse than expected, we could see the Federal Reserve step in as promised by Fed Chair Powell on Friday shortly before the market ramped-up into the close. If this number comes in better than expected we forecast panic buying.
Technicals: Price action has traded at a high velocity in a very wide range, it is imperative that you pick your spots and stick to your game plan. With that said, there are very strong levels of technical support below the market being tested. In the same manner that selling picked up when the S&P closed below the 200-dma, traders must keep the same pulse on the NQ. Furthermore, the NQ held a constructive close Friday on two other fronts. The first being the .382 retracement from the 2018 correction at 8257 and the second being a trend line from the same low at about 8390 today. We believe a market to be trending over a time-horizon when holding a .382. As for the trend line, today it aligns closely with our momentum indicator; above here remains favorable in the near-term. This brings us to another crucial fact; since falling on Thursday February 20th from a new record high, both the S&P and NQ have traded below our momentum indicator and have each failed to decisively close back above in order to neutralize the tape. After Friday’s rip and last night’s two-sided volatility both have caught up to trade around and above those levels designated as our Pivots; above here is favorable on the session. Holding above such paves a path of least resistance to our only layers of major three-star resistance at 3051-3061.25 in the S&P and 8751.50 in the NQ; we advise that traders look to capitalize on longs against these levels. However, continued price action below these pivots invites fresh waves of selling. Lastly, 24,000 in the Dow is a paramount level. We will hold a minor Bullish Bias given our more intermediate to long-term focus.
Bias: Neutral/Bullish
Resistance: 2951**, 2984.50**, 3006-3021**, 3001.25**, 3051-3061.25***
Pivot: 2940
Support: 2878.25-2889.25**, 2855-2857.25***, 2800-2810.25**, 2775***
NQ (March)
Resistance: 8512**, 8574.25**, 8677**, 8751.50***
Pivot: 8390-8408
Support: 8257***, 8224.25*, 8184***, 8126.25**, 8051.75***
Crude Oil (CLJ)
Last week’s close: Settled at $44.76, down $2.33 on Friday and down $8.62 on the week
Fundamentals: Crude oil was one of the first risk-assets to turn positive after last night’s poor open. This could be a sign of things to come this week as sentiment is arguably exacerbated in the near-term and especially so given that OPEC+ meets later this week; risk to the upside on a larger than 600,000 barrel per day production cut. China’s Manufacturing data topped even the worst expectations over the weekend and takes credit for that opening last night, but as price action battles back the emphasis will be on today’s U.S February ISM Manufacturing read – larger discussion in the S&P section. Traders must keep a pulse on the broader risk-environment, stocks.
Technicals: Crude oil did close below major three-star support at $45.33 on Friday and spent the entire intraday session below there. However, the late Friday stability and last night’s rip higher have allowed price action to hold above our momentum indicator which aligns with that long-term level of support. Continued price action above this level will pave a path of least resistance to major three-star resistance at $47.65. Given such, we will introduce a cautiously bullish outlook while holding out above here. To the upside, there is extremely significant resistance at $49.50. Lastly, managed money according to the Commitment of Traders showed fresh buying through last Tuesday; crude oil is attempting to bottom out for the fourth time since the 2018 collapse after the managed money net-long position pings the general 100,000 contract level.
Bias: Neutral/Bullish
Resistance: 46.71-47.09*, 47.65***, 48.99-49.50****
Support: 45.33-45.47***, 44.76*, 43.32**, 42.36***
Gold (GCJ)
Last week’s close: Settled at $1,566.7, down $75.80 on Friday and down $82.1 on the week
Fundamentals: Gold was the largest bloodbath on the board Friday, and this was solely due to margin calls and thus the necessity to raise cash. Gold is a liquid asset and simply put, because of that, it was a casualty. Going forward, we continue to strongly believe there is tremendous value in the metal at and near its current levels. However, this week will act as an intermediate-term inflection point. The Dollar is already losing value and Treasuries are trading at record levels as the odds for the Fed to cut rates have now increased to a 100% probability of 50 basis points by their March 18th meeting. The bad news is this is already priced in. What happens next will be very dependent on the data this week. Gold can trade higher with stocks as long as it is Fed driven, however, if the data surprises to the upside Gold is in store for additional waves of selling. ISM Manufacturing is due at 9:00 am CT and Friday bring Nonfarm Payroll.
Technicals: Gold stabilized overnight and worked higher, testing to exactly the 38.2% Fibonacci retracement from the high set the last Sunday night and the low set Friday. This will bring a line in the sand on the week aligned with our previous $1,619.6 and a close above there is again near-term bullish. For now, our momentum indicator aligns with old support at 1598-1600 and the metal is very vulnerable to waves of selling while holding below here. Given Friday’s damage, such could open the tape to 1530.
Bias: Neutral/Bullish
Resistance: 1612.8-1619.6***, 1627.9**, 1640-1642.9***
Pivot: 1598-1600
Support: 1576.3**, 1566.7-1569***, 1560**, 1551.1**, 1530***
Bill Baruch spoke of a line in the sand on TD Ameritrade Network Friday before the bell; this is 2855-2857.25 in the S&P and the 200-day moving average for the NQ coming in today at 8184. Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com. Sign up for a complimentary two-week trial of 1 or all 6 of our daily Blue Line Express commodity reports!Please sign up at Blue Line Futures to have our research emailed to you each morning.
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