Yesterday’s landscape was as ripe for the picking as they come. For full disclosure, in case you have not caught on here, we have detailed the path of least resistance to be higher, therefore, we have been bullish in bias and positioned accordingly since mid-to-late September, states Bill Baruch of Blue Line Futures.
E-mini S&P (December)
Yesterday’s close: Settled at 3702, up 11.25
NQ, yesterday’s close: Settled at 12,637.50, up 41.50
Fundamentals: Prior to this, we had turned bearish in bias for a short period in August through the onset of September. On the futures side, we have taken advantage of this rally through the highly liquid Micro E-mini contracts, specifically the Micro NQ and Micro Russell 2000. These contracts are one tenth the size of the regular E-mini contracts and provide such flexibility in maintaining a directional position. Think about it, ten years ago the S&P was at 1200 and the NQ just above 2000; they are now three and six times those levels and this does not mean you need to trade three and six times larger.
On the wealth management side, we have discussed here an overweight position in Industrials and Financials while maintaining strong exposure in the Tech leadership. Although this is a rally that one should not fight, it certainly does not mean corrections of 2-5% cannot happen at any time and for any reason. This is where your overall trade plan, objective, and timeline matter most. As we are more intermediate to long-term in our trade plan, our objective is to ride this technical breakout as fresh money comes off the sidelines due to less uncertainties and during a seasonally bullish time of year. In order to ride this to the full extent, one must further their trade plan and size their position accordingly to withstand swings and provide enough psychological bandwidth to allow it to play out. We expect such tailwinds to reach peak exhaustion through the first half of the first quarter of 2021, at that point we could expect a reasonable correction (those reasons are for another discussion, call our trade desk at 312-278-0500). Again, please do not misinterpret us, there will be hurdles and there will be reasons for market gyrations and therefore (to reemphasize), your own trade plan, objective, and timeline matter to how you position.
In the end, one must also never forget that it is just one trade and do not ever hesitate to remind yourself of this. Furthermore, market catalysts can quickly change from day to day; be ready to adapt accordingly.
Of such hurdles, the continued surge in Covid-19 cases and the fear of fresh lockdowns and restrictions are certainly atop our list. Although the vaccine has provided a powerful tailwind to risk assets broadly, there are still questions as to delivering it and this morning UK health regulators warned of allergic reactions to Pfizer’s. Another of our largest concerns is of course tied to Washington. The market is pricing in fiscal stimulus before a deal has been reached. Whereas we fear the results underwhelming markets, they could also top expectations. Day in and day out, as a trader and investor, you face these hurdles and many others such as US-China relations; it is how you apply such hurdles to your trade plan, objective, and timeline.
Technicals: As we noted above, yesterday’s landscape was ripe for the picking. The S&P pulled back perfectly to test major three-star support at 3662-3664.50. Yesterday, we said, “We imagine a continued hold through the morning again paves the way for the bulls.” That it did as the S&P responded by gaining 1% from there. Yesterday’s low in the NQ was 12,502 and the bulls stepped in front of major three-star support at 12,450-12,462. We further said, “Our momentum indicators come in at 3682 in the S&P and 12,565 in the NQ; regaining these levels and holding above within the first hour also paves the way for the bulls.” That it certainly did as each set a record high close and extended those highs overnight. We added yesterday that, “Only a break below major three-star support will signal that more of a consolidation is necessary within this very bullish market.” However, note that we said within “this very bullish market,” in case 3662-3664.50 or 12,450-12,462 is taken out, it does not mean the bull run is over.
Crude Oil (January)
Yesterday’s close: Settled at 45.60, down 0.16
Fundamentals: Commodities have broadly taken a breather this week as the US dollar has not noticeably extended losses. However, the Aussie dollar and Chinese yuan each versus the US dollar have set new swing highs on today’s session. We believe this narrative to be buoying crude oil despite a lackluster read on last night’s API data. The private survey posted +1.141 mb of crude, +6.442 mb gasoline, and +2.316 mb distillates. Analysts had actually been expecting -1.424 mb of crude. The market has completely ignored API’s massive composite build of nearly 10 mb. Analysts also expect +2.27 mb gasoline and +1.414 mb distillates. With price action lurking just below the $46 mark, which has acted as a barrier with strong overhead technical resistance, it would seem that given the bar set by API last night, anything remotely near analysts’ expectations for the official EIA report at 9:30 am CT would be bullish. Still, as always, traders must keep a pulse on the broader risk-environment.
Technicals: We have been and will maintain a more bullish bias as price action has done exactly as we want; pullbacks have so far held major three-star support at 44.97-45.30 beautifully. Ultimately, this has paved the way for technical strength into US hours. The overnight high did again struggle at major three-star resistance, however, we believe continued action above our pivot of 45.60-45.65 through the data this morning will pave the way for a breakthrough.
Gold (February)
Yesterday’s close: Settled at 1874.9, up 8.9
Fundamentals: Gold is on its backfoot today in a very constructive manner. This is where we must remind you that nothing moves in a straight line! When they do, they are exacerbated moves that almost always require sharp mean reversions such as July 21 through August 12. However, such mean reversions are hard to pick as markets can remain irrational for extended periods. For now, we find some renewed US dollar weakness as overall supportive to gold’s continued rebound; the Chinse yuan hit a new two-and-a-half-year high versus the dollar today. Although a rising rate environment is a headwind to gold, and yes, we do think a 10-year yield at 1.25% is more likely than not, the reason in which yields rise is also important.
There is tremendous supply hitting the market this week, and the Treasury will auction 10-years today. If we also see supply being priced in due to the anticipation of fiscal stimulus, there are two sides to the coin, and this would actually be supportive to gold. Although we expect gold to trade higher in the coming months, there are two things to think about. First, will other metals outperform gold? We tend to believe silver easily can. Secondly, as we refer to our conversation in the S&P section; what is your trade plan, objective, and timeline? Furthering that notion, are you sized properly to withstand volatility? With that said, major three-star resistance at 1870-1878 yesterday was a terrific spot to lighten a long position.
Technicals: The session’s swing has already laid beautiful groundwork. We were not surprised one bit to see gold retreat from major three-star resistance at 1870-1878; that is what it is was supposed to do! Especially so after it broke below our momentum indicator that came in at 1869 at 8:00 pm CT last night. The wave of weakness has back and filled major three-star support at 1852.7 perfectly. We would now like to see this level hold and gold settle the session back above 1869 in order to pave the way for the next wave of buying. Our intermediate objective is 1925-1930 as discussed in my CNBC interview and trade recommendation last week. However, we must adapt to a changing environment per our discussion in the S&P section; a close below 1852.7 today will catch our attention.
Learn more about Bill Baruch at Blue Line Futures.
