This week’s powerful rally is nothing new. Like clockwork, coming out of volatility spikes, US benchmarks have surged to pare losses, writes Bill Baruch President of

E-mini S&P (December) / NQ (December)

S&P, yesterday’s close: Settled at 4685, up 95.00

NQ, yesterday’s close: Settled at 16,318, up 475.25

Fundamentals: In fact, the routine rebound of 3-4% has been taking place for years. The one difference this year being that the market sets course for new record highs very quickly. It comes down to positioning. Simply, some market participants and portfolio managers quickly deleverage and race to reposition once the market turns. Others, such as dealers, are more sophisticated. They drive prices lower by racing to hedge short gamma exposure and once the market turns, they must flip. With more retail traders participating in options than ever before, typically buying calls, this forces dealers to exacerbate upside moves in the same manner as those to the downside. Of course, fundamental headlines do their part. Coming out of the weekend, subsiding Omicron fears, progress in Washington, and corporate buybacks all brought bullish tailwinds. We also like to think a lack of talk from Fed officials did its part. Speaking of such, investors and traders alike now have one week to prepare for a very critical Federal Reserve meeting and vaccine headlines are likely to remain plentiful.

The World Health Organization and vaccine makers have brought a one-two headline punch that is becoming as routine as the market’s rebound. This morning, the WHO said, “changes in the Omicron variant may result in lower natural immunity.” The S&P 500 (SPX) slipped about 15 points and crude oil $1.50 or 2%. Have no fear, an hour later, Pfizer (PFE) and BioNtech (BNTX) said three doses of their vaccine neutralizes the Omicron variant. The S&P rebounded by 30 points to a new session high and crude pared most of those losses.

More than the intraday headline swings, this news is crucial from a macro standpoint; it will help set the Fed’s tone next week. Remember, Chair Powell stayed his planned course, surprising markets with a very hawkish rhetoric last Tuesday. Committee members seemed to do the same. If Omicron fears dissipate and more information is known, we could be in store for a faster taper announcement and markets will not like this.

Technicals: Price action remains firm, but volatility clearly remains a factor. A quick wave of profit taking late yesterday pinged major three-star support in the S&P at 4662-4669.75. Previous resistance is now support, just as we look below there to another wave of major three-star support.

Crude Oil (January)

Yesterday’s close: Settled at 72.05, up 2.56

Fundamentals: Crude oil is firm, enjoying a massive wave of risk-on to start the week, as inventories come into focus. In the S&P/NQ section, we highlighted some of the early morning volatility coming on vaccine headlines from the WHO and Pfizer/BioNTech. Headlines detailing OPEC+ production data also may have had a hand in some selling; the cartel announced it added 500,000 bpd in November. However, according to S&P Global Platts, 80% of the increase came from five members, including Saudi Arabia and Russia. As you dive into the data, OPEC+ produced 41.71 mbpd, still 4.15 mbpd below their April 2020 level. Furthermore, Saudi’s increase to 9.89 mbpd is still below their quota of 9.91 mbpd. Price action looks to have completely discounted it ahead of the US open.

Data from the private API survey late yesterday showed a much large headline draw in crude oil, likely having a buoying effect. They estimate -3.089 mb of crude, +3.705 mb gasoline, and +1.228 mb of distillates. For today’s official data, analysts expect -1.705 mb crude, +1.798 mb gasoline, +1.571 mb distillates.

Technicals: Price action drove perfectly into our major three-star resistance yesterday at 72.93-73.13, with a high of 73.03, and this has been subdued since. Our momentum indicator is rising with the tape to 71.90 and brings a point of balance through this more fundamental session. A close above this level will leave the bulls in the driver’s seat across all timeframes, but we must see price action chew through resistance. There is a lot of support below the market, some back and fill makes sense given the steep climb over the last two days.

Gold (February) / Silver (March)

Gold, yesterday’s close: Settled at 1784.7, up 5.2

Silver, yesterday’s close: Settled at 22.523, up 0.26

Fundamentals: Gold began to show some life overnight, trading to a high of 1794.3, but this quickly dissipated at the onset of US hours. An upbeat vaccine narrative from the WHO and Pfizer/BioNTech would seemingly pave the way for a more hawkish Federal Reserve. Bonds are also on their backfoot. However, the US dollar retreated from early morning highs. Metals bulls must lean on this as a reason to buoy the complex. If gold was a safe haven last week to equity market fears, it has held ground very well this week as the S&P rebounded to within 1% of record highs. Ultimately, we are in a wait-and-see ahead of next week’s Fed meeting and it is imperative for gold, and silver, to hold a constructive technical path.

Technicals: Major three-star resistance in gold at 1781-1786.3, which now aligns with our momentum indicator, remains sticky although it traded above here to ping key resistance at 1791-1795. As for silver, it cannot break its tether to the 22.43-22.48 pocket in either direction.

Learn more about Bill Baruch at Blue Line Futures.