US equity benchmarks finished poorly Monday but worked back into the middle of their range ahead of a pivotal morning, states Bill Baruch of BlueLineFutures.com.
E-mini S&P (December) / NQ (December)
S&P, yesterday’s close: Settled at 3966.00, down 34.25
NQ, yesterday's close: Settled at 11,734.75, down 113.25
Fundamentals: The October US PPI report comes on the heels of last week’s soft CPI (relative to expectations, of course). The S&P 500 (SPX) gained 5.8% last week and the NQ 8.8%, underpinned wholly by CPI and the odds of the Fed hiking by 50bps in December rising to 80% (from a coin flip with 75bps). Producer prices are a leading indicator of consumer prices. Will today’s read confirm or deny last week’s market strength? Expectations are for headline PPI at +0.4% M/M and +8.3% Y/Y, down from +8.5% in September, and for Core at +0.3% M/M and +7.2% Y/Y, both unchanged from September. We also look to fresh November NY Empire State Manufacturing at that time.
In the quarter’s biggest week for retail, Walmart (WMT), the world’s largest retailer, and Home Depot (HD) both reported earnings this morning. Both crushed top and bottom-line estimates, but it was Walmart whose shares surged by more than 6%, joining Taiwan Semiconductor (TSM) in bringing broad market tailwinds to lift the S&P back above 4000 ahead of PPI. Walmart said the inventory glut is receding and expects less of a drop in annual profits. Shares of Taiwan Semiconductor, the world’s largest fabricator, are up by 10% after Berkshire Hathaway’s (BRK.A) filing showed it invested $5 billion in the company in Q3.
Traders should keep an eye on Fed. A slate of economic data from China last night came in soft with both Industrial Production and Fixed Asset Investment missing expectations. However, German ZEW Sentiment was not as bad as expected this morning.
Technicals: Price action in the S&P has regained 4000 and the NQ has set a fresh swing high ahead of today’s PPI data. The immediate reaction to PPI is going to be somewhat of a binary event, if it is hot we are likely to see heavy selling, and if it is soft we are likely to see a continued surge. We remain cautiously bullish in bias over the intermediate and long-term. It is important to stick to your game plan and lean on the levels. A close above the critical 4001 level in the S&P and 11,732-11,760 in the NQ today would mean the market survived PPI and this should open the door to our next upside target in each, highlighted as rare major four-star resistance.
Crude Oil (December)
Yesterday’s close: Settled at 85.87, down 3.09
Fundamentals: Crude oil traded to 84.06, the lowest since October 25th after finishing poorly yesterday and incurring added pressures after disappointing data from China (highlighted in the S&P/NQ section). Weakness took hold yesterday after OPEC lowered their demand outlook for both 2022 and 2023 by 100,000 bpd in their monthly report. The IEA also trimmed their 2023 demand forecast by 40,000 bpd to 1.61 mbpd, down from 2.12 mbpd this year. However, they expect Russian output to fall by 1.4 mbpd in 2023 due to sanctions and expect the market to remain tight, and this seemed to help reinvigorate the tape. Also, a weaker US dollar after a stronger-than-expected labor report from the UK and ZEW Sentiment data from Germany is helping to underpin commodities, but the currency landscape will come down to this morning’s US PPI.
Technicals: Price action sliced through major three-star support at 87.52-87.90, an inflection point we highlighted, and slipped down to a new swing low of 84.06. We maintain our comments from last week, there is significant support from $86 down to $82, and the market is trying to respond this morning. We have two waves of major three-star resistance overhead, aligning with yesterday’s damage.
Gold (December) / Silver (December)
Gold, yesterday’s close: Settled at 1776.9, up 7.5
Silver, yesterday's close: Settled at 22.113, up 0.446
Fundamentals: Gold and silver have stayed in a constructive range overnight, underpinned by US dollar weakness. Furthermore, the Chinese yuan did not slip after last night’s data misses, and the US Treasury market is trading higher ahead of PPI. However, it must be understood today’s tape comes down to this morning’s US PPI report. Amid hotter-than-expected inflation that strengthens the US dollar and rates, we will watch gold closely for a divergence, remaining strong, in order to signal a deeper underlying strength. Still, a strong report is likely to derail the recent rally and encourage consolidation at best.
Technicals: We remain more bullish gold and silver over the intermediate to longer-run, however, must reduce our bias given what could be a binary event with PPI this morning. Although we may be at the onset of a larger and broader trend higher, it is important to understand markets do not move in a straight line. Overhead, we have rare major four-star resistance in gold.
Learn more about Bill Baruch at Blue Line Futures.