US equity benchmarks finished sharply lower on Monday and the weakness carried overnight, says Bill Baruch, president of BlueLineFutures.com.
Price action tried muscling higher Friday after a strong jobs report but quickly stalled to start the new week.
US Dollar strength, global recession fears, and the virus reemergence in China have all weighed on sentiment. With this renewed pessimism ahead of today’s critical read on inflation (CPI), we are likely seeing a ‘sell first, ask questions later’ mantra acting as a further undertow. Given the air pocket in June, after May’s CPI release, managers are battening down the hatches. We certainly added some insurance at Blue Line Capital, our wealth advisor.
The US Dollar Index extended its run overnight, hitting 108.42. The fresh two-decade high came after German ZEW Economic Sentiment came in at the lowest level since 2011, -53.8 versus -38.3 expected. This indicator gauges the six-month outlook and has now come in heavily negative for the fifth straight month, driving the Euro near parity. The US Dollar must reprieve in order for risk assets to find a sustained rally. With mounting pessimism and the CME’s Fed Watch Tool now showing a 90% probability the Fed only hikes 50 basis points later this month, today’s CPI could be that turning point.
Given Monday’s underwhelming start to the week, there are two angles to dissect this market from:
First, price action failed into the late June top and both the S&P 500 (SPX) and Nasdaq (NDX) surrendered major three-star support aligning with the July sixth gap. This pocket, for both indices, will serve as our Pivot and point of balance today, adjusted slightly and noted below. Price action must regain this area in order to neutralize the overnight weakness and a failure to do so will leave sellers in the driver’s seat heading into tomorrow.
On the positive side, the session lows in both indices, as well as the Dow (DJI), held above the 21-day moving average, an indicator that all three truly struggled to clear at the late June peak. Furthermore, there is an uptrend line from the June 17 low in the S&P that brings added support at the 3800 area. If these supports are violated, we view the near-term positive momentum as turning negative and opening the door for the S&P to test our next major three-star support, aligning with the lows of the month at 3741.25-3744.50.
Demand concerns are again weighing heavily on the energy complex, led by fears Shanghai will go into a second lockdown and the OPEC Monthly Report. Price action slipped sharply at 5:30 am CT, ahead of OPEC’s report, as a very soft tape overnight caved to heavy selling. Although OPEC’s expectations for 2023 demand growth are more robust than the IEA, it is at a slower pace than this year, which was left unchanged. US Dollar strength has certainly been a headwind to commodities, but its strength as a safe haven has also become a barometer of the impending global recession; the Dollar Index hit a fresh 20-year high of 108.42 overnight. The focus shifted to weekly inventory data as the session unfolds and Chinese Trade Balance Tuesday at 10:00 pm CT.
Major three-star resistance at 104.79-105.20 kept last week’s rebound in check through yesterday and paved the way for sellers. Outside of a blip yesterday afternoon, price action has been steadily below our momentum indicators since slipping through midnight Sunday night. Today’s break came heavily through major three-star support at 101.35-101.69, previous support is now resistance.
Gold and Silver both tested new lows overnight as the US Dollar Index hit a fresh 20-year high and USDCNH has gained as much as 1% on the week. On the bright side, the yield of the ten-year has slipped back to 2.90% this morning. Falling yields will help encourage a rebound in precious metals once the US Dollar stops rising. While Dollar strength comes on global recession fears, it also comes ahead of tomorrow’s CPI data. This also tells us we are likely to see selling in things like Gold and Silver as traders try to front-run the trend in inflation. Ultimately, we believe this could open the door to a steady rebound if tomorrow’s data is contained. Currently, the odds of the Fed hiking 50 basis points later this morning have risen to 90%.
The trend is lower, but we have maintained a cautiously Bullish Bias due to Gold and Silver’s respective value areas and strong technical support at 1721.1-1730.7 and 18.78-19.03. However, at the end of the day, they must respond. Meagerly lingering at these levels is not enough, buyers must come in and defend such support. We believe this answer will be defined through tomorrow. For now, our Pivot and point of balance is our momentum indicator and has been slipping.
Learn more about Bill Baruch at Blue Line Futures.