US benchmarks worked through gyrations yesterday morning to finish strongly. Call it a hangover from Friday’s late selling and an early struggle to chew through major three-star resistance, coupled with the US dollar reversing losses, states Bill Baruch of Blue Line Futures.
E-mini S&P (December)
Yesterday’s close: Settled at 3576, up 21.75
NQ, yesterday’s close: Settled at 11,905.25, down 0.50
Fundamentals: Strength has been fairly broad since, despite big tech and healthcare’s hesitance to join. Apple shed 2.97% yesterday, while Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Alphabet (GOOGL), and many drug manufacturers all failed to finish in the positive. Although US benchmarks have all have extended gains overnight, it is the Russell 2000 Small Cap Index leading the bunch after closing at a fresh record high and topping it by as much as 1.7%. A theme we have discussed is the continued trickle of vaccine news, which has powered the reopening stocks; Energies +7.09%, Financials +1.88%, and Industrials +1.64% were the best performers yesterday.
On the political front, we have said it before, markets like less uncertainties. President Trump authorized the start of transition to President-elect Biden. Furthermore, Biden has called on former Fed Chair Yellen as his Treasury Secretary. Ultimately, the market may feel like it knows what to expect and is finding solace in these maneuvers.
There is no denying that Covid-19 is currently ravaging the country (and globe). Something to think about; national, state, and local governments along with the media ramped up the cause for caution ahead of Thanksgiving to discourage large gatherings and a vicious cycle of spreading. We could see some of that headline news flow dissipate after Thanksgiving and it could quickly bring a wave of bullish sentiment.
US Flash PMIs crushed expectations yesterday morning. Manufacturing PMI was 56.7, the best increase since 2014, versus 53.0 expected and 53.4 last month. Services PMI was 57.7, the best since 2015, versus 55.0 expected and 56.9 last month. Given the data, it would certainly make sense to see the US dollar gain ground on the news and the dollar index reverse from the 92 floor. Although Manufacturing was solid in Europe, the Services sector contracted for the third month in a row, and its worst yet at 41.3. This morning, German Ifo Business Climate and Current Assessment nudged out expectations. This coupled with vaccine news bringing tailwinds to emerging market currencies, the dollar has again found itself on its back foot and this is supportive to risk assets.
US Case Shiller Home Price Index is due at 8:00 am CT and Consumer Confidence follows at 9:00 am CT along with Richmond Manufacturing. St. Louis Fed president Bullard speaks at 10:00 am CT, NY Fed president Williams is at 11:00 am CT, and Fed governor Clarida is due at 11:45 am CT. Traders should also keep an eye on comments from the ECB, President Lagarde speaks at 8:00 am CT and the more dovish executive board member Lane is at 11:45 am CT, traders will look for hints of new measures in December.
Technicals: Yesterday’s weathering of early volatility was followed by steady buying into the close. Ultimately, the hold of strong support levels early through the opening hour was bullish and the close out above major three-star resistance in the S&P at 3482-3586 allows us to increase our bullish bias. However, we will be looking for a confirmation from the NQ today as it faces and has struggled against its own major three-star resistance at 12,062-12,098. The NQ’s more sideways trade has allowed our momentum indicator to catch up and aligns with settlement at 11,905-11,940 at our pivot; continued action above here today will be supportive and lay healthy groundwork for a push higher. For the S&P, our momentum indicator is rising and has caught up with previous major three-star resistance at 3582-3586, this is now major three-star support and a new floor; as long as this holds, we will be more bullish in bias.
Crude Oil (January)
Yesterday’s close: Settled at 43.06, up 0.64
Fundamentals: Crude oil is up by more than 1% this morning amid a broad risk-on move. However, it is the energy space outgaining much of the board as the fear of demand deterioration through next year fades on vaccine optimism. In fact, the energy equities gained 7% yesterday. Yesterday’s blowout PMI data could also be just what was needed to bring stealth support as the week unfolds into the Thanksgiving holiday and ahead of next week’s OPEC+ meeting. Fresh US dollar weakness is certainly an added tailwind this morning. Furthermore, we find a warmer winter weather narrative forcing many to under-position for a potential bullish move tied to the potential of what would become colder than expected temperatures; in this case the space would have some catching up to do, being led by natural gas. API is due after the bell at 3:30 pm CT.
Technicals: Price action is trading into a large pocket of major three-star resistance at 43.33-43.83, and given the recent momentum, we feel upbeat on the prospects of chewing through it. Our momentum indicator is rising and comes in at 43.20 to couple with yesterday’s settlement as our Pivot; continued action above here is very supportive.
Gold (December)
Yesterday’s close: Settled at 1837.8, down 34.6
Fundamentals: The selling continues and for the bull camp, today’s December options expiration for both gold and silver could not come soon enough. With the market already on weak footing, yesterday’s blowout PMI data was the straw that broke the camel’s back. In the end, this is a much-needed cleansing; greedy owners clinging to in-the-money gold Calls at 1800 and 1850 have now found those go all but worthless. This is also a much-needed cleansing, not only of weak hands, but strong ones that did not take profit on this summer’s historic rally. After 12:30 pm CT today, the metal’s complex finds itself taking the first step in finding a bottom to the selling. Will it be today? Maybe, but probably not.
Those long in December futures contracts must be out by Friday, unless they are looking to take delivery, and this is the second step. From there, the cleansing should be nearly complete and the fundamentals that drove gold all year could then go to work. Yes, vaccine optimism has weighed on gold and diverged it from risk-assets, but there are still many hurdles to vaccine distribution. Furthermore, many look to a vaccine as the light at the end of the coronavirus tunnel. We certainly do, and for all intents and purposes, it is. However, it should remove deflationary fears, a hurdle for gold, and the damage left behind is still very unknown. Lastly, the Federal Reserve said they are “not even thinking about thinking about” raising rates and has already promised to let inflation run symmetrically hot while the economy recovers. This market cleansing, those continued uncertainties, and a very bullish seasonal time of year is almost upon us. We love seeing sentiment get negative on gold, because it will pave the way for a terrific buying opportunity over the coming months.
Technicals: Once our rare major four-star support in gold was broken, the pent-up selling began. We had no choice other than to turn fully neutral upon such an event yesterday; the path of least resistance in the near-term is lower. Price action has slipped sharply testing only a key level at 1801.6 but make no mistake major three-star support at 1788-1790 is in the crosshairs. We must see a close back above 1825-1829.8 in order to stabilize in the immediate-term, but we do not expect that today. Only a close back above 1845.4-1851 will neutralize this leg and open the door for repair, but we do not expect that this week.
Learn more about Bill Baruch at Blue Line Futures.
